Impairment of assets Gadgets Ltd has a division that represents a separate cash
ID: 2533340 • Letter: I
Question
Impairment of assets
Gadgets Ltd has a division that represents a separate cash generating unit. At 30 June 2016, the carrying amounts of the assets of the division, valued pursuant to the cost model, are as follows:
$
242,000
800,000
10,000
1,909,000
The receivables were regarded as collectable, and the inventory’s fair value less costs to sell was equal to its carrying amount. The patent has a fair value less costs to sell of $180,000, and the land has a fair value less costs to sell of $780,000.
The directors of Gadgets estimate that, at 30 June 2016, the fair value less costs to sell of the division amounts to $1,750,000, while the value in use of the division is $1,840,000.
As a result, management increased the depreciation of the plant and equipment from $40,000 p.a. to $45,000 for the year ended 30 June 2017.
By 30 June 2017, the recoverable amount of the cash generating unit was calculated to be $20,000 greater than the carrying amount of the assets of the unit.
Required:
Determine how Gadgets Ltd should account for the results of the impairment test at 30 June 2016 and 30 June 2017, and prepare any necessary journal entries. Show all workings and provide references to the relevant accounting standard to support your answer.
Assets:$
Cash242,000
Plant and equipment 600,000 Less: accumulated depreciation (200,000) Land800,000
Inventory 190,000 Accounts receivable 67,000 Patent 200,000 Goodwill10,000
Carrying amount of cash generating unit1,909,000
Explanation / Answer
Impairment loss on June 30, 2016 Goodwill 10000 Land 20000 Patent 20000 Plant & Equipment 19000 Total impairment Loss 69000 Reversal of Impairment loss on plant and equipment on June 30, 2017 Prohibited in US GAAP but allowed in IFRS Amount in $ Date General Journal Debit Credit As per US GAAP & IFRS June 30, 2016 Impairment loss 69000 Goodwill 10000 Land 20000 Patent 20000 Plant & Equipment 19000 To record the Impairment loss on assets As per only IFRS as US GAAP does not allow Reversal of impairment loss. June 30, 2017 Plant & Equipment 15000 Accumulated depreciation on plant & Equipment 5000 Impairment Loss 20000 To record the reversal of impariment loss. The Relevent Accounting standard IFRS IAS-36 US GAAP ASC 820-10 US GAAP ASC 360-10-35-20
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