Hume Lodgings purchased a motor vehicle at a cost of $40 000. Its carrying amount was $12 000 and its fair value was assessed to be $10 000. Sinclair Ltd purchased the motor vehicle from Hume Lodgings for $14 000. What value is recorded for this motor vehicle in the balance sheet of Sinclair Ltd? (Type answer without the $ or comma eg: 10000 )

Question

BlackTom AI · Accepted Answer

The task asks for the value recorded for the motor vehicle in Sinclair Ltd's balance sheet.
First, recall the general rule: on initial recognition, an asset is recorded at its cost. For Sinclair, that would be the purchase price paid to acquire the vehicle, which is 14,000.
However, impairment considerations can reduce the carrying amount if the recoverable amount of the asset is below its carrying amount. The recoverable amount is the higher of (a) value in use and (b) fair value less costs to sell.
In this problem, we are given the fair value of the vehicle as 10,000. We are not provided with any value in use, so the recoverable amount would be at most 10,000 (assuming value in use is not higher than this and there are no other indications of higher recoverable amount).
Since Sinclair’s initial carrying amount would be 14,000, and the recoverable amount is 10,000, impairment would be recognized for 4,000 (14,000 − 10,000), reducing the carrying amount to 10,000.
Optionally, one might be tempted to keep the asset at cost (14,000) or to use the purchase price alone (14,000). But that ignores the impairment requirement: if there are indications that recoverable amount is below carrying amount, you must write the asset down to its recoverable amount.
Therefore, the recorded value in Sinclair’s balance sheet would be 10,000.
Note on what is not stated: if value in use were provided and were higher than 10,000, the recoverable amount could be higher accordingly, but given only the fair value is provided, 10,000 is the recoverable amount used for impairment in this scenario.
In summary, Sinclair would not record 14,000 indefinitely; impairment from 14,000 down to 10,000 is indicated by the provided fair value and the absence of a higher value in use.

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