Reference no: EM132993056

Question - You are the accountant for a reporting entity, Herbal Ltd. You have received a phone call from the managing director concerning the following.

On 1 July 2018, Herbal Ltd acquired an asset for $1,000,000, which it is depreciating using the straight-line method over 20 years (hence, $50,000 depreciation charged each year). The director of Herbal Ltd has realised a further $200,000 was written off as impairment loss for the year ending 30 June 2020 in addition to $50,000 depreciation for the year in that year. (Recoverable amount of the asset at 30 June 2020 due to COVID19 was estimated to be $700,000).

The directors are very concerned about writing off asset values like that and asked you the following.

1) What is impairment loss compared to depreciation expense?

2) What is recoverable amount?

3) Can the asset carrying amount be increased in the future? Assume at 30 June 2021, a favourable reassessment of the recoverable amount occurs as the world economy has been recovered. The recoverable amount of the asset is estimated to be $880,000 on 30 June 2021. Calculate carrying amount of asset, depreciation expense for the year ending 30 June 2021. Journal entries are not required.

Required - Provide advice to the managing director, with relevant references to the Australian Accounting standards in your answer.