Question

Kohlman Corporation owns machinery with a book value of $380,000. It is estimated that the machinery will generate future cash flows of $350,000. The machinery has a fair value of $280,000.
Kohlman should recognize a loss on impairment of:

a. $ -0-.
b. $ 30,000.
c. $100,000.
d. $ 70,000.

Answer 1

Answer:

Option B: $30,000 Impairment Loss of Machinery

Explanation:

IAS 36 – Impairment of Assets states that an asset is considered to be impaired if the Carrying Amount of an asset is greater than the Recoverable Amount. Recoverable Amount of an asset is the higher of Fair Value less Cost to Sell and Value-in-Use.  

Fair value less cost to sell is defined as the amount receivable from sale of assets less the cost of disposal, whereas Value in Use is defined as the present value of future cash flows from using an asset,

In case of Kohlman Company, recoverable amount of Machinery will be $350,000 i.e. Value in Use (future cash flows) as it is greater than the Fair Value of Machinery. The book value of machinery $380,000 exceeds the recoverable amount of $350,000. Therefore, the asset is considered to impaired and must be written down by $30,000 ($380,000 - $350,000 = $30,000). The impairment loss is charged to profit and loss account.

Journal Entry to record impairment loss:

DR  Profit & Loss Account   $30,000

CR  Equipment             $30,000