On 1 July 2013, Black Cabs Pty Ltd paid $270,000 to acquire a taxi licence that

Question

On 1 July 2013, Black Cabs Pty Ltd paid $270,000 to acquire a taxi licence that allows the holder to provide a taxi service in the Sydney metropolitan area. Included in the cost was $10,000 in Stamp Duty (a non-refundable tax) that was paid to the NSW Office of State Revenue. The taxi licence, which is valid for a period of ten years, can be renewed upon payment of a nominal fee. Black Cabs Pty Ltd assesses the useful life of the taxi licence as indefinite. Also on 1 July 2013, Black Cabs Pty Ltd paid $60,000 to acquire a motor vehicle to be used to provide taxi services. The motor vehicle has an estimated useful life of five years and a zero residual value. Black Cabs Pty Ltd uses the cost model to measure both the taxi licence and the motor vehicle and uses the straight-line method of depreciation for the motor vehicle.
In early 2015 a competitor entered the Sydney taxi market. The competitor’s business model was based on hiring independent drivers who were connected with customers through a mobile phone app. Despite there being questions about the legality of the competitor’s services, concerns were expressed that the taxi industry would be adversely affected. On 30 June 2015, Black Cabs Pty Ltd conducted an impairment test. As at this date, the following information was available:

However, in early 2016, it became clear that the competitor was struggling to attract sufficient customers to make their business viable and that the State government was about to introduce legislation that would impose severe restrictions on the competitor. On 30 June 2016, Black Cabs Pty Ltd conducted another impairment test. As at this date, the following information was available:

Required
(a) Explain the terms ‘fair value less costs of disposal’ and ‘value in use’.
(b) Prepare appropriate journal entries for Black Cabs Pty Ltd to record the events on 30 June 2015 and 30 June 2016.

Asset Fair value less costs of disposal Value in use Taxi licence $180,000 $150,000 Motor vehicle $27,000 $30,000

Explanation / Answer

(a) Fair Value less costs of disposal is defined as the price that would be received by selling an asset less any costs which are incidental to such sale. For eg. to sell a taxi, it may require to give an advertisement in the news paper such advertisement cost will be treated as costs of disposal and if we sell through a broker and pay any commission to such broker, that commission will also be treated as cost of disposal. All these expenses we can deduct from fair value of an asset.

'Value in use' is defined as the present value of the future cash flows expeced to be derived from an asset or cash generating unit. Value in use is determined through the calcualtion of a an asset;s estiated discounted future cash flows.

(b) JOURNAL ENTRIES TO RECORD THE EVENTS ON 30 JUNE 2015 AND 30 JUNE 2016

___________________________________________________________________________________________

DATE                     TITLE & DESCRIPTION                         DEBIT ($)                      CREDIT ($)                               30 JUNE,15            Amortization                                            27,000

                                    Accumulated Amortizaton                                                       27,000

                          (Asset Licence is amortized= 270,000/10)   

                           Impairment loss                                          63,000

                                 Asset a/c                                                                                   63,000

                          (Impairment loss recoreed)

                         Impairment loss = Carrying value - Fair value

                         = (270,000-27,000) - 180,000 =    63,000

                         MOTOR VEHICLE:

                         Depreciaiton                                                    12,000

                                 Accumulated Depreciaiton                                                       12.000

                        (Depreciation recorded (60,000/5)

                        Impairment loss                                              21,000

                            Accumulated impairment loss                                                        21,000

                        (Accumulated impairment loss recorded)

                        Note: Impairment loss=Carrying amount - fair value

                                 (60,000 - 12,000) - 27,000)=21,000

30 june 2016     Amortization                                                               20,000

                                   Accumulated Amortization                                                                20,000

                         (Amortization of licence recorded = 180,000/9)

                          Note: Impairment gian should not be recognised

                         Depreciation A/c                                                       6,750

                               Accumulated Depreciaiton                                                                   6,750

                        (Depreciation recorded = 27,000/4)

                      Impairment loss                                                              250

                              Accumulated loss                                                                                    250

                      (Impairment loss recorded )

                      Impairment loss = Carrying amount - fair value

                      (27,000-6750) - 20,000 = 250

NOTE: BALANCE IN ACCUMULATED DEPRECIAITON AND ACCUMULATED AMORTIZATION AND ACCUMULATED IMPAIRMENT LOSS TO BE TRANSFERRED TO ASSET ACCOUNT BY CREDITING ASSET ACCOUNT AND DEBITING TO ACCUMULATED DEPRECIATION/ACCUMULATED AMORTIZATION/ACCUMULATED IMPAIRMENT LOSS A/C

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