Reference no: EM132574466
Question - Rapid Mining Ltd in 2009 started its mining business in Meekatharra in Western Australia. The company mines silver and exports to China.
On 1 July 2016, Rapid Mining acquired and installed an item of equipment for use in its mining business in Meekatharra. Rapid Mining has provided you with the following information relating to its acquisition of the equipment:
Cost at acquisition date: 1 July 2016 $1,800,000
Estimated useful life: 10 years
Expected residual value: $300,000
Depreciation method: straight-line basis over its useful life Straight-line
At the end of the 2018 reporting period the annual review of all equipment found that this particular item of equipment had incurred significant damage because of harsh tropical weather condition in Meekatharra. Rapid Mining used an external firm of Actuaries to provide the fair values of its equipment's. The actuaries as a result of the damage, estimated the fair value less costs of disposal of the equipment at the end of the reporting period as follows:
Annual review end of the 2018 reporting date, fair value less costs of sell/disposal $900,000
Expected annual net cash flows next 8 years $157,500
Expected residual value Unchanged
The management of Rapid Mining and the actuaries uses a discount rate of 8 per cent for calculations of this kind.
REQUIRED -
1. Determine whether Rapid Mining has incurred an impairment loss in relation to the asset.
2. If so, determine the amount of the impairment loss, and provide the journal entry necessary to recognise any impairment in the equipment. Please show all your calculations.
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