Happy Travel Group (HTG) has a small hotel in Central which was acquired on 1 Ja

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 18.4

Explanation / Answer

Happy Travel Group a The amount of goodwill on HTG's hotel on 1 January 2016 is as follows Fair Value of asset on 1 January 2017 17.5 Million Hotel aquired for an amount on 1 January 2017 18.0 Million The amount of goodwill o.5 Million b Value in use of Cash generating Unit      A 16.0 Million Net selling price of Cash generating unit      B 18.0 Million Recoverable amount of Cash generating unit-higher of A or B 18.0 Million Carrying amount of cash generating unit Carrying amount before impairment review 18.4 Less : Loss on vehicles's acident 0.04 Less : Bad-debts for corporate client 0.06 Add : Goodwil 0.5 18.8 Million Since Carrying amount of cash generating unti is more thn recoverable amount, there is exists an impairment loss 0.8 Million which needs to be allocated as follows First to goodwill 0.5 Million Balance to Land & Building 0.3 Million Since there is an indication that land has lower fair value, we will allocate remain impairment loss to it Date/S. N. Accounts Title & Explanation Debit Credit Amount in $ Amount in $ 31-Dec-16 Impairment loss 800000 Goodwill 500000 Land & Building 300000 To record the entry for impairment loss of assets Alternatively, we can allocate remaining impairment loss of 0.3 million, i.e. after allocation of 0.5 million to goodwill, to all fixed asset proportionately c) HTG's hotel requires use of cash generating unit, because it is difficult to derive the cash flow from individual asset. Therefore, we will group all asset in one cash generating unit to derive impairment loss.

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