Nov 2018 Q2 b.

Due to a change in Pusiga Ltd’s production plans, an item of machinery with a carrying value of GH¢11 million at 31 December 2017 (after adjusting for depreciation for the year) may be impaired due to a change in use. An impairment test conducted on 31 December 2017, revealed its fair value less cost of disposal to be GH¢5 million. The machine is now expected to generate
an annual net income of GH¢2 million for the next three years at which point the asset would be sold for GH¢2.4 million. An appropriate discount rate is 10%. Pusiga charges depreciation at 20% on reducing balance method on machinery.
Note:

• The present value of ordinary annuity of GH¢1 at 10% for one year, two years and three years are 0.909,1.736 and 2.487 respectively.
• The present value of GH¢1 at 10% for one year, two years and three years 0.909, 0.826 and 0.751 respectively

Required:
In accordance with IAS 36: Impairment of Assets, explain with justification the required accounting treatment in the financial statements of Pusiga Ltd for the year ended 31 December 2017.                                                                                       (3 marks)