Question
Wyndcliffe Printing bought a printing press on January 1, 2025 for $500,000 (5-year life, no residual value, straight-line). After 2026 depreciation its carrying amount at December 31, 2026 is $300,000, with 3 years of life remaining.
A competitor's cheaper technology is an impairment indicator. At December 31, 2026:
- Fair value less costs of disposal is $240,000.
- Expected net cash inflows from using the press are $100,000 in 2027, $100,000 in 2028 and $90,000 in 2029, discounted at a pre-tax rate of 10% (factors: 0.909091, 0.826446, 0.751315).
At December 31, 2027, after that year's depreciation, the competitor's product has failed and the press's recoverable amount is estimated at $215,000. Round to the nearest dollar.
Required:
- Value in Use — at December 31, 2026.
- Impairment Loss — recognised at December 31, 2026.
- Journal Entries — the 2026 impairment, 2027 depreciation, and any reversal at December 31, 2027. Use Impairment Loss, Depreciation Expense, Reversal of Impairment Loss and Accumulated Depreciation and Impairment.
Statements in this challenge
- Value in UseNumeric Answer
- Impairment LossNumeric Answer
- Journal EntriesJournal Entry
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 16 — Property, Plant and Equipment
Initial cost captures everything needed to bring the asset to its location and working condition — purchase price, import duties, site preparation, installation and testing. After recognition, subsequent expenditure is capitalised only if it improves the asset beyond its original standard; otherwise it is repairs.
Common mistakes
- Expensing delivery, installation or testing costs that form part of initial cost.
- Capitalising routine maintenance, or expensing an upgrade that genuinely extends useful life.
- Including recoverable input tax or abnormal wastage in the cost of the asset.
IFRS vs US GAAP: IFRS permits the revaluation model for a whole class of assets; US GAAP requires historical cost.
Further readingIAS 16: initial cost and depreciation