7.21 Impairment loss LO5 Excalibur Ltd operates in the Swan Valley in Western Au

Question

7.21 Impairment loss LO5 Excalibur Ltd operates in the Swan Valley in Western Australia where it is involved in the growing of grapes and the production of wine. In June 2019, it anticipated that its assets may be impaired due to a glut on the market for grapes and an impending tax from the Australian government seeking to reduce binge drinking of alcohol by teenage Australians. its fair value of $120000. The land had previously been revalued upwards by $20000 entity's assets was S1 456 000 and the revaluation of the land were as follows. Land is measured by Excalibur Ltd at fair value. At 30 June 2019, the entity revalued the land to As a result of its impairment testing, Excalibur Ltd calculated that the recoverable amount of the The carrying amounts of the assets of Excalibur Ltd prior t o adjusting for the imp airment test $ 850 000 (194 000) 128 000 1454 000 (750000) 60000 (44 000) 80000 Land (at fair value 1/7/18) Plant and equipment Accumulated impairment losses Trademarks wine labels Current assets 7 000 9000 1. Prepare the journal entries required on 30 June 2019 in relation to the measurement of the assets of Excalibur Ltd. 2. Assume that, as the result of the allocation of the impairment loss, the plant and equipment was written down to $640000. If the fair value less costs of disposal of the plant and equipment was determined to be $600000, outline the adjustments, if any, that would need to be made to the journal entries you prepared in part 1 of this question, and explain why adjustments are or

Explanation / Answer

1. Journal as on 30-June-2019

2. Calculation of Impairment Loss:

The basic rule is to recognise impairment if carrying amount exceeds the recoverable amount.

First, we need to determine the carrying amount. The plant and equipment has a cost of $640,000.

Second, we need to determine the recoverable amount. Recoverable amount is the higher of fair value less cost of disposal and value in use. Fair value less cost of disposal in this scenario is $600,000. Value in use is the present value of future cash flows which not given in this scenario. Therefore, Recoverable Amount is $600,000.

Carrying Amount is $640,000 while recoverable amount is $600,000. An impairment loss of $40,000 is to be recognised.

The journal entry would be:

Impairment Loss A/c.......................................Dr. 40,000

To Accumulated Impairment Loss A/c 40,000

Particulars Amount in $ Revaluation of Land: Revaluation Reserve A/c................................Dr. 8000 To Land A/c 8000 (Being impairment loss on land is adjusted using Revaluation Reserve which was created due to upward revaluation of Land in the previous year to the extent of Rs. 20,000) For Impairment of Fixed Assets: Impairment Loss A/c.............................Dr. 144,000 To Accumulated Impairment Loss 144,000 (Being the assets impaired and loss is recognised

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