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LagendaBhd has a building in Arang Batuwhich it rents out. It accounts for investment property using the cost model.The building was bought 15years ago at a cost of RM20 millionand the estimated useful life was determined on purchase to be 50 years. Due to ecological changes, the area isprone tofloods. The fair value of the building at the end of the current year was RM7million. The present value of the flow of rental is RM5.6mil, taking a market interest rate of 12%.
Required:
Question (i) Review whether or not the asset needed to be impaired.
Question (ii) In year 2020, the market interest rate dropped to 5%. Evaluate the effect of the change in interest rate on the carrying amount of the asset.
Question (iii) The interest rate remained at 12% but in year 2020 the government enlarged the area enclosed by the river and built embankments tostop flooding.Discuss how this action affects the value of the building.
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