ExpertHard2 marksMultiple Choice
ACCA · Question 05 · Recording Transactions: Tangible Assets
Section A
SteelForge Heavy Industries purchased a blast furnace on 1 January 20X2 for $5,000,000. It has an estimated useful life of 20 years and a residual value of $200,000. On 31 December 20X5, due to new environmental regulations, the furnace was assessed for impairment. Its fair value less costs to sell is $3,800,000 and its value in use is $3,950,000. What is the impairment loss to be recognized in the year ended 31 December 20X5?
Section A
SteelForge Heavy Industries purchased a blast furnace on 1 January 20X2 for $5,000,000. It has an estimated useful life of 20 years and a residual value of $200,000. On 31 December 20X5, due to new environmental regulations, the furnace was assessed for impairment. Its fair value less costs to sell is $3,800,000 and its value in use is $3,950,000. What is the impairment loss to be recognized in the year ended 31 December 20X5?
Answer options:
A.
$0
B.
$90,000
C.
$240,000
D.
$1,050,000
How to approach this question
1. Calculate annual depreciation: (Cost - Residual) / Useful life. 2. Calculate Carrying Amount at 31 Dec 20X5 (after 4 years). 3. Determine Recoverable Amount (higher of Fair Value less costs to sell and Value in Use). 4. Impairment = Carrying Amount - Recoverable Amount.
Full Answer
B.$90,000✓ Correct
Annual depreciation = ($5,000,000 - $200,000) / 20 = $240,000. Accumulated depreciation for 4 years (20X2 to 20X5) = $960,000. Carrying amount = $5,000,000 - $960,000 = $4,040,000. Recoverable amount is the higher of FV less costs to sell ($3,800,000) and Value in Use ($3,950,000), which is $3,950,000. Impairment loss = $4,040,000 - $3,950,000 = $90,000.
Common mistakes
Using the lower of FV and VIU as the recoverable amount, or forgetting to deduct residual value when calculating depreciation.
Practice the full ACCA FA — Financial Accounting Practice Exam 6
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