Reference no: EM132802019

Question - On 1 July 2015, Durham plc acquired and installed an item of machinery for use in its manufacturing business. When acquired at cost of £1,200,000, the machine had an estimated useful life of ten years and an expected residual value of zero. Durham depreciates machinery on a straight-line basis over its useful life.

At the end of the 2017 reporting period (30 June 2017), the annual review of all machinery found that this particular item of machinery had incurred significant damage. Thus, the engineering department estimated the fair value less costs to sell the machinery at the end of the reporting period was £510,000. As the machinery can operate in a limited capacity, it is expected to provide annual net cash flows of £105,000 for the next eight years (assumed to occur at the end of reporting periods). The expected residual value will remain unchanged. The management of Durham uses a discount rate of 8% for calculations of this kind.

Determine whether Durham has incurred an impairment loss in relation to the asset. If so, provide the journal entry necessary at 30 June 2017 to recognise any impairment in the machine.