Question

120 marks b) A company has a machine in its statement of financial position at a carrying amount of GH¢ 300,000. The machine is used to manufacture the company's best-selling product range, but the entry of a new competitor to the market has severely affected sales. As a result, the company believes that the future sales of the product over the next three years will be only GH¢ 150,000, GH¢ 100,000 and GH¢ 50,000. The asset will then be sold for GH¢ 25,000. An offer has been received to buy the machine immediately for GH¢ 240,000, but the company would have to pay shipping costs of GH¢ 5,000. The risk-free market rate of interest is 10% Page 4 of 6

Answer 1

​​​​​​b).According to IAS 36 impairment of assets, If the carrying amount exceeds the recoverable amount, the asset is described as impaired. The entity must reduce the carrying amount of the asset to its recoverable amount, and recognise an impairment loss.

Recoverable amount is the higher of (a) fair value less costs to sell and (b) value in use.

Fair value less costs to sell is the arm’s length sale price between knowledgeable willing parties less costs of disposal.

Here, Fair value less cost to sell =

240000-5000=235000

The value in use of an asset is the expected future cash flows that the asset in its current condition will produce, discounted to present value using an appropriate discount rate.

Year	Amount(A)	Discounting factor @ 10%(B)	Net present Value(A*B)
1	150000	0.909	136350
2	100000	0.826	82600
3	50000	0.751	37550
Scrap sale at end of year 3	25000	0.751	18775
		Total	275275

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Therefore recoverable amount = higher of fair value less cost to sell or value in use =2,75,275

So impairment loss = carrying value - recoverable amount = 300000-275275= 24,725

Treatment :The impairment loss is recognised as an expense (unless it relates to a revalued asset where the impairment loss is treated as a revaluation decrease).

1.If treated as expense :

Impairment loss a/c Dr 24725

To fixed asset a/c 24725

2.If it is related to an asset which was revalued earlier( to the extend of revaluation surplus relating to that asset)

Revaluation surplus a/c Dr 24725

To fixed aaset a/c 24725

C.) According to IAS 23 - Borrowing cost,

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset and, therefore, should be capitalised. Other borrowing costs are recognised as an expense

A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use or sale.Here 2 assets take 1 year to complete and hence are considered as qualifying assets.

Where funds are borrowed specifically, costs eligible for capitalisation are the actual costs incurred less any income earned on the temporary investment of such borrowings.Here loan is taken specifically to build these 2 assets and idle funds are temporarily invested during first 6 months.Hence net interest expense idle funds during first 6 months is 2%,ie, ( 9-7)%

Calculation of borrowing cost is as under

Borrowing cost to be capitalized Asset A On For 250,000 invested Jan 22500 OUD X 9% For Next 250000 During Jan to June temporarily invested. 250 000 x (9-15%* year During July to Dee Used for Asset A 250000 x 9%x * 1 year 2500 = 11250 Total Box Borrowing cost for Assel A = 2asoo ta 520 +11250 = 36250 Asset B For I 500000 invested on 'gan = 500 000 xq% 45.000 For Next sooooo 1 3 During Janto June 6months temporarily During July to Dee 500000 x (9-7%xt year invested. Used for Asset B 500000 x 9% 1 year I5800 = 22,500 Total Bor Borrowing cost for Aset B = 45000 45000+22500 - 72,500

Therefore borrowing cost to be capitalized for

Asset A= 36250

Asset B = 72500

So total cost of assets on 31 Dec 2016

Asset A= 250,000+250,000+36,250=5,36,250

Asset B = 500,000+500,000+72,500=10,72,500