Happy Travel Group (HTG) has a small hotel in Central which was acquired on 1 Ja
ID: 2575444 • Letter: H
Question
Happy Travel Group (HTG) has a small hotel in Central which was acquired on 1 January 2016 for $18 million. The fair value of the hotel’s net assets on the acquisition date and their carrying amount at the financial year end date are detailed in Table 1:
Fair value
1 January 2016
$million
Carrying amount
31 December 2016
$million
The following facts were discovered before an impairment review on 31 December 2016:
In June 2016, a rival hotel opened another ‘boutique’ hotel 50 meters away from HTG’s hotel. The revenue of HTG’s hotel was seriously affected and on 31 December 2016, the value-in-use of HTG’s hotel was $16 million.
The owner of the rival hotel has offered to buy HTG’s hotel (including all of the above net assets) for $18 million.
An independent surveyor stated the fair value of the land and building should be $12 million.
In Table 1, the carrying amount of the vehicles included a hotel vehicle which had an accident on 31 December 2016. This vehicle was beyond repair after the accident. The carrying amount of that vehicle was $40,000 and the insurance company indicated that it was used by an uninsured purpose and the loss is not covered by insurance.
A corporate client of HTG hotel owing $120,000 went into liquidation on 31 December 2016. HTG estimated that they will receive only 50% of the amount outstanding.
Required:
a Determine the amount of goodwill for HTG’s hotel on 1 January 2016. (2 marks)
b Prepare accounting journal entries to record the impairment loss of the HTG hotel on 31 December 2016. Show your workings. (15 marks)
c Explain why the impairment test of HTG’s hotel requires the use of a cash generating unit, rather than being based on individual assets. (8 marks)
Fair value
1 January 2016
$million
Carrying amount
31 December 2016
$million
Land and building 11.0 13.0 Equipment 2.7 2.4 Cash 4.2 3.5 Vehicles 0.3 0.2 Account receivables 1.0 1.5 Account payables (1.7) (2.2) 17.5 18.4Explanation / Answer
a) Calculation of goodwill Goodwill = purchase consideration - Fair value of net assets = $18mn- $17.5 mn = $0.5 mn b) Journal Entry Account Debit Credit Impairment loss $1,790,000 Accumulated Impairment loss $1,790,000 Working a b c=b-a Fair value Carrying amount $million $million Imaprment Land and building 12 13 1 Vehicles 0.16 0.2 0.04 Corporate Clients 0.75 1.5 0.75 0 Total 1.79
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