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%.The present value of $1 received in 6 years' time at a discount rate of 7% 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.

Question

Quizplus · Accepted Answer

The correct answer is B because according to AASB 136, the recoverable amount should be calculated using the discounted cash flows. The present value of the land ($800,000 * 0.6663 = $533,040) is less than the cost ($600,000), indicating a need for a write-down.

Casey Co Ltd Is Assessing the Recoverable Amount of Some