An entity applies IFRS. At the end of the reporting period on December 31, Year 1, indications are that an entity's machine may be impaired. The carrying amount of the machine on that day is $40,000 ($50,000 cost - $10,000 accumulated depreciation). According to the entity's estimates, the fair value minus costs to sell and the value in use of the machine on December 31, Year 1, are $32,000 and $38,000, respectively. What impairment loss for this machine, if any, is recognized in the entity's financial statements on December 31, Year 1?

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Business

Jaydin Finley

26 October, 05:07

An entity applies IFRS. At the end of the reporting period on December 31, Year 1, indications are that an entity's machine may be impaired. The carrying amount of the machine on that day is $40,000 ($50,000 cost - $10,000 accumulated depreciation). According to the entity's estimates, the fair value minus costs to sell and the value in use of the machine on December 31, Year 1, are $32,000 and $38,000, respectively. What impairment loss for this machine, if any, is recognized in the entity's financial statements on December 31, Year 1?

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Rigoberto Duffy · Answer 1

Impairment loss for this machine should be recognized at $2,000 to bring its carrying amount to its recoverable amount which is $38,000/

Explanation:

We have the machine's recoverable amount is the higher of the fair value minus costs to sell and the value in use of the machine; which in this case means the machine recoverable amount = the value in use of the machine = $38,000

Under IFRS 36, the asset's carrying amount should not be recorded higher than its recoverable amount through either sales or use; in this case, as stated above, recoverable amount is $38,000.

As the machine's carrying amount is given at $40,000; a $2,000 (40,000 - 38,000) impairment loss needs to be made to bring the machine's carrying amount to its recoverable amount to comply with IFRS 36.