On 1 July 2010, Sarina Ltd paid cash of $200,000 to acquire an item of machinery. On this date it was estimated that the machinery had a useful life of 10 years and a residual value of $10,000. Sarina Ltd uses the revaluation model to measure items of machinery and the straight-line method of depreciation.

 

On 30 June 2011, the fair value of the machinery was $172,000.

 

On 30 June 2012, the fair value of the machinery was $154,000.

 

On 30 June 2013, the fair value of the machinery was $150,000.

 

On 31 December 2013, the machinery was sold for $100,000 cash.

 

Sarina Ltd also acquired an item of equipment on 1 July 2012 for $250,000. On this date the equipment had a useful life of 10 years and a zero residual value. Sarina Ltd uses the cost model to measure items of equipment and the straight-line method of depreciation.

 

In relation to the item of equipment, indicators of impairment had been identified for the reporting period ended 30 June 2014 while indicators for a reversal of impairment had been identified for the reporting period ended 30 June 2015. The fair value less costs of disposal and the value in use of the equipment on these dates were:

 

Date Fair value less Value in use

costs of disposal

30 June 2014 $190,000 $185,000

30 June 2015 $175,000 $178,000

 

 

Required

 

(a) Provide appropriate journal entries to record the transactions in relation to the item of machinery that occurred between 1 July 2010 and 31 December 2013. Show all calculations. (13 marks)

 

(b) Provide any necessary journal entries related to the impairment of the item of equipment on 30 June 2014 and 30 June 2015. Show all calculations

(5 marks)

Explain and calculate the ceiling beyond which the carrying amount of the item of equipment cannot be increased on 30 June 2015 when reversing the impairment