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Open Sea owns and operates a plant that cost RM2
Open Sea owns and operates a plant that cost RM2.4 million and had an accumulated depreciation of RM720,000 on 1 January x4. It is being depreciated at 15% on cost. On 1 July x4, the plant was damaged and due to unavailability of spare parts, it is not possible to repair it. But it can still be operated at reduced capacity. As a result of the damage, the remaining life of the plant is only two years. Based on the reduced capacity, the estimated value in use of the plant was RM500,000. The plant can be disposed of for RM200,000. Open Sea was offered a trade- in value of RM800,000 against a replacement plant which had a cost of RM3.5 million. Open Sea is reluctant to replace the plant. The trade-in value is available only if the plant is replaced. Required: Prepare extracts of the financial statements for year x4. Explain how you arrived at the figures.
Expert Solution
Working Notes:
(i) From 1 January x4 to 1 July x4 (Damaged Date) depreciation charged was RM126,000
[(2,400,000-7,20,000)
15%6/12]
Note: We will charge depreciation on reducing value, not on the cost of the plant.
(ii) Recoverable amount of the plant RM800,000
[Higher of trade-in value (RM800,000) and its estimated value plus disposed of value RM700,000 (RM500,000+RM200,000)]
(iii) Depreciation charged from 1 July x4 to 31 Dec x4 is RM60,000
[RM800,00015%6/12]
Therefore, the Income Statement extract will be shown:
Impairment loss RM754,000
Depreciation charged RM186,000 (RM126,000+RM60,000)
Income Statement
For the year ended 31 Dec x4
| Particulars | RM |
| Impairment Loss | 754,000 |
| Depreciation expenses | 186,000 |
Balance Sheet
As of 31 Dec x4
| Assets | RM |
| Plant RM 800,000 | |
| Less: Depreciation (6mohts) RM60,000 | 740,000 |
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