Reference no: EM132903088

Question - On 1 July 2020, Trinity Ltd acquired and installed an item of machinery for use in its manufacturing business. When acquired the machinery cost $2 200 000, had an estimated useful life of 10 years, and had an expected residual value of $200,000. Trinity Ltd depreciates machinery on a straight-line basis over its useful life. At 30 June 2021, the machinery had a carrying amount of $1 800 000.

At the end of the 2021 reporting period the annual review of all machinery found that this particular item of machinery had incurred significant damage as a result of being rolled down a sand dune. As a result of the damage, the engineering department estimated the fair value less costs of disposal of the machinery at the end of the reporting period was $1,000 000. As the machinery can operate in a limited capacity, it could be expected to provide annual net cash flows of $150,000 for the next 8 years. The expected residual value will remain unchanged. The management of Trinity Ltd uses a discount rate of 8 per cent for calculations of this kind. The present value of an annuity of $1 for eight years discounted at 8 per cent is 5.7466.

Required - Determine whether Trinity Ltd has incurred an impairment loss in relation to the asset. If so, determine the amount of the impairment loss, and provide the journal entry necessary to recognise any impairment in the machine for the year ended 30 June 2021.