Question

Dark Ltd acquired a taxi business on 1 January 2018 for $1,600,000. The value of the assets of the business at that date, based on fair value less cost to disposal, were as follows:

Office building 1,000,000
Taxi vehicles 480,000
Taxi license 120,000
Trade receivables (net) 40,000
Cash 20,000
Trade payables 80,000

The taxi business was considered to be a cash-generating unit after the acquisition. The estimated useful life of all taxi vehicles was 5 years and that of the office building was 10 years from 1 January 2018. St raightline depreciation was used by Dark Ltd for all of its tangible assets. All tangible assets were assumed to have zero residual value.

On 1 February 2018, this cash-generating unit had two taxi vehicles stolen. The fair value less cost to disposal of these taxi vehicles was $120,000. As a result of this, Dark Ltd wanted to recognize an impairment loss of $180,000 (inclusive of the stolen vehicles) due to the decline in the value in use of the cash-generating unit. The market price of the office building was $1,050,000 on 1 February 2018.

a Determine the goodwill acquired on 1 January 2018.

b Prepare accounting journal entries to record the impairment of the cash-generating unit on 1 February 2018. Show your workings.

c Should the following be classified as held for sale or discontin ued operations? Explain your rationale in detail.

i Dark Ltd is committed to a plan to sell its staff quarters and has engaged a property agent to locate a buyer. Dark Ltd's employees will use the staff quarters until the completion of the new staff quarters in six months' time. The old staff quarters can be transferred to the buyer when all employees move out.

ii Dark Ltd has been using two factories to manufacture traditional light bulbs. An increasing demand for LED lights has caused a significant drop in sales of the light bulbs. Dark Ltd has decid ed to move all the production facilities to one of the factories but keep the empty factory in the hope that the demand for traditional light bulbs may go back up in the near future.

Answer 1

Question (a)

Computation of the Goodwill Working Note #1 : Particulars Amount$ Deprecation Office building      10,00,000      8,333 Taxi vehicles        4,80,000      8,000 Taxi license        1,20,000 Trade receivables (net)          40,000 Cash          20,000 Trade payables         -80,000 Total Value of the Net Assets acquired      15,80,000 Less Purchase Consideration Paid     -16,00,000 Goodwill         -20,000 a) Value of the Goodwill Acquired on 1st Jan 2018 $20000

Question (b)

b) Accounting Entries to record the Impairment Working Note #2 : Impairment arise when = Carrying amount > Recoverable amount Where Recoverable amount = Net Selling Price or Value in Use whichever is lower Here Fair Market Value is given , hence consider the same as Recoverable amount . i.e. $1,20,000+$10,50,000=$11,70,000 ( Taxi + Building) (a) (b) (a)-(b) = © ( D ) E = C- D Particulars Amount$ Depreciation Carrying Amt on 1st Feb Allocation Balance Amt Office building      10,00,000 8333*                      9,91,667    9,91,667 Taxi vehicles        4,80,000 8000**                      4,72,000 160000    3,12,000 Goodwill 20000 0                         20,000 20000            -                       14,83,667 1,80,000 13,03,667 * Note: Depreciation for 1month out of 10 years ** Note: Depreciation for 1month out of 5 years # The carrying amount after allocation is $13,03,667/- which is greater than the recoverable amount computed above . i.e. $1170000/- Date Entry Debit ($) Credit ($) 1st Feb 2018 Impairment Loss Account Dr 180000 To Goodwill A/c 20000 To Taxi Vehicles Account 160000 ( Being amount of Impairment loss allocated to Goodwill and Taxi Vehicles ) 1st Feb 2018 Profit & Loss A/c Dr 180000 To Impairment Loss Account 180000 ( Being amount of Impairment loss Debited to Profit & Loss A/c)

Question (C)

C)(ii) No, not a Discontinue Operation Shifting of the Production or Marketing activities, not a Discontinue Operation. C)(ii) No, not a Discontinue Operation Closure of product line may not necessarily signify discontinuing operation if the operation is continuing for a different product. It should be noted that any planned change in the product line may not be treated as a discontinuing operation