Quorum Ltd owns and operates an item of machinery. At 1 October 2019 the machinery had a carrying value of R700 000. The original cost was R1 400 000 and accumulated depreciation was R700 000. The machinery is depreciated at a rate of 12.5% per annum on a straight line basis. On 1 February 2020 the machinery sustained some damage after an incident in the factory. An assessor has inspected the machinery and determined that the estimated value in use of the machinery is now R500 000. The current disposal value after costs of the machinery is R350 000 and trade‐in value (only in the event of an upgrade) is R550 000. The company still considers the machinery to be functional and is not considering an upgrade at the moment. What is the carrying value of the machinery immediately before impairment?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Quorum Ltd owns and operates an item of machinery. At 1 October 2019 the machinery had a
carrying value of R700 000. The original cost was R1 400 000 and accumulated
R700 000. The machinery is depreciated at a rate of 12.5% per annum on a straight line basis.
On 1 February 2020 the machinery sustained some damage after an incident in the factory. An
assessor has inspected the machinery and determined that the estimated value in use of the
machinery is now R500 000. The current disposal value after costs of the machinery is R350 000
and trade‐in value (only in the event of an upgrade) is R550 000. The company still considers the
machinery to be functional and is not considering an upgrade at the moment.
What is the carrying value of the machinery immediately before impairment?
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