Casey Co Ltd Is Assessing the Recoverable Amount of Some

question 30

Multiple Choice

Casey Co Ltd is assessing the recoverable amount of some land it invested in 5 years ago at a cost $600,000.Management has sought independent valuation advice that indicates that the land may be sold in 6 years' time for $800,000.Since the land is not generating any cash flows,this is its undiscounted recoverable amount.The appropriate discount rate is estimated to be 7 per cent.The present value of $1 received in 6 years' time at a discount rate of 7 per cent is 0.6663.What is the effect of using the discount rate on the need to write-down the value of the asset?

• A) Since the recoverable amount of $800,000 is greater than the cost of $600,000, there is no need to write-down the asset.
• B) The undiscounted amount may not be used according to AASB 136 so the asset should be written down by $66,960.
• C) There is no need to write-down the asset in either case since the undiscounted amount is greater than the cost and the discounted amount of $900,438 is also greater than the cost.
• D) The undiscounted amount may be used in this case as the asset will not be continually in use, and therefore 'value in use' cannot be calculated. As this amount is higher than the cost there is no need to write-down the asset.
• E) None of the given answers.

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Definitions:

Accumulated Depreciation

Accumulated Depreciation is the total amount of depreciation expense that has been recorded for an asset over its useful life, indicating the amount of value the asset has lost over time.

Book Value

The net value of a company's assets as found on its balance sheet, calculated by subtracting total liabilities from total assets.

Adjustment

Changes made to the financial records at the end of an accounting period to reflect true and fair values.

Unearned Fees

Income received by an entity for services yet to be provided and is recorded as a liability until the service is rendered.