Further Practice Question

Following is the impairment analysis performed by the junior accountant of Junaid Limited:

Carrying amount of plant (1 Jan 2022) 1,250,000

Recoverable Amount 450,000
Impairment (800,000)

Detailed Impairment review:

2022 2023 2024 2025

Inflows from sales 860,000 680,000 1,050,000 780,000
Outflows for Costs (344,000) (285,600) (683,000) (390,000)
Interest Expense (2,450) (3,560) (4,000) (4,020)
Depreciation Expense (250,000) (250,000) (250,000) (250,000)
Profit from plant 263,550 140,840 113,000 135,980
Tax @ 30% (79,065) (42,252) (33,900) (40,794)
Net Income 184,485 98,588 79,100 95,186
PV at 6.3% after tax rate 173,551 87,248 65,853 74,549
Value in Use 401,202

Fair Value of the asset was found to be Rs 500,000 with a 10% cost of sales.

Further information
1. Inflows from first year includes Rs 15,000 relating to a past receivable
2. Costs of yr3 inludes a future overhauling cost of Rs 200,000 as a result the following
sales and cost of goods sold are incorporated in the cash flows of year 3 and year4

Sales Cost of Sales

Year 3 450,000 207,000
Year 4 270,000 135,000
3. useful life of the asset is determined to be 4 years.

Required
Calculate the carrying amount of the asset at the end of the year 31 December 2022
Solution of Further Practice Question

Revised working of Impairment

- 1 2 3 4
Inflows 845,000 680,000 600,000 510,000
Outflows (344,000) (285,600) (276,000) (255,000)
Residual Value of Asset 250,000
501,000 394,400 324,000 505,000
PV at 9% pre-tax 459,633 331,959 250,187 357,755
Value in use 1,399,534
Fair Value of plant 450,000
Recoverable Amount 1,399,534

Impairment
Carrying amount 1,250,000
Recoverable amount 1,399,534
Impairment Nil Impairment exists

Carrying amount at 1 Jan 22 1,250,000

Depreciation 2022 (250,000)
Carrying amount at 31 Dec 22 1,000,000