[reo]

NINJA Question –

I do not just want to know the answer, I also want to know how to solve it. Any assistance would be appreciated, thank you!

On January 2, 2012, Reed Co. purchased a machine for $900,000 and established an

annual depreciation charge of $150,000 over a 6-year life. At the end of 2014, Reed

concluded that $400,000 was a reasonable estimate of the sum of the undiscounted net

cash inflows expected to be recovered through use of the machine for the period January

1, 2015 through December 31, 2017. The machine’s fair value was $360,000 at the end of

2014. In Reed’s December 31, 2015, balance sheet, the machine should be reported at a

carrying amount of

a) $300,000

b) $240,000

c) $150,000

d) $0

Reo

[Oimie]

@reo, I believe the answer is $300,000. But forgive me if I am wrong because I've been brainwashed and exhausted by governmental accounting these past 4 days.

So to get the carrying value, you simply take the asset's orginal book value – accumulated depreciation.

At year end of 2014 we know that the fair value of the asset is $360,000, but the sum of undiscounted cash flows is expected to be $400,000. Since the sum of undiscounted cash flows is higher than the fair value, we can assume there is no impairment at this point in time. So we do not write down the asset to $360,000. Simply continue depreciating as nothing has happened.

So the machines BV was orginally $900,000 with a 6 year life. They told you annual depreciation is $150,000. So by December 2015, 4 years has passed. $900,000 – $600,000 = $300,000.

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[Author]

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