Reference no: EM133050843

Question - S Inc. is preparing its financial statements for the year ended 30 November 2021. On 1 May 2021, the company purchased a factory for the manufacture of optical disks, paying 24,000,000. The factory will be depreciated over its estimated life of 10 years using the straight-line method on a full year basis with no residual value.

The asking price for the factory had been 30,000,000. However, S Inc. estimated the net present value of the factory's future expected net cash flows at 28,500,000 and the price eventually agreed with the vendor was 24,000,000. During October 2021 a rival company announced that it had patented a new technology which has been enthusiastically greeted by the major players in the industry. S Inc. now feels that it may be necessary to revise downwards its expectations for the factory. It now believes that the net present value of the expected net cash flows from the factory as at 30 November 2021 was 20,500,000. The net realizable value of the factory was estimated at 14,000,000 as at 30 November 2021.

Required - Discuss whether or not there is evidence of impairment and describe how the factory should be treated in the financial statements for the year ended 30 November 2021.