Question

X’ Ltd anticipated that its assets may be impaired in June 2020. Land is measured by ‘X’ Ltd at fair value. At 30 June 2020, the entity revalued the land to its fair value of $12 000. The land had previously been revalued upwards by $2 000. As a result of its impairment testing, ‘X’ Ltd calculated that the recoverable amount of the entity’s assets was $145 600. The carrying amounts of the assets of ‘X’ Ltd prior to adjusting for the impairment test and the revaluation of the land were as follows.

Non-current assets

Buildings $340 000 Accumulated depreciation (77 600)

Land (at fair value 1/7/2019) 51 200

Plant and equipment 581 600 Accumulated depreciation (300 000)

Goodwill 24 000 Accumulated impairment losses (17 600)

Trademarks — labels 32 000

Current assets

Cash 2 800

Receivables 3 600

Non-current assets

Buildings $340 000 Accumulated depreciation (77 600)

Land (at fair value 1/7/2019) 51 200

Plant and equipment 581 600 Accumulated depreciation (300 000)

Goodwill 24 000 Accumulated impairment losses (17 600)

Trademarks — labels 32 000

Current assets

Cash 2 800

Receivables 3 600

Required:

1. Prepare the journal entries required on 30 June 2020 in relation to the measurement of the assets of ‘X’ Ltd.
2. Assume that, as the result of the allocation of the impairment loss, the plant and equipment was written down to $256 000. If the fair value less costs of disposal of the plant and equipment was determined to be $240 000, outline the adjustments, if any, that would need to be made to the journal entries you prepared in part 1 of this question, and explain why adjustments are or are not required. 

Answer 1

a). Asset $600800 ($640000-$39200 write-down of land)

Recoverable amount $145600

Impairment loss $455200

Goodwill written off   $6400 ($24000-$17600)

balance to be allocated $448800

Buildings 262400 204453 57947

Plant & Equipments 281600 219413 62187

Trademarks 32000 24934 7066

Journal Entries:-

1. DR Asset Revaluation surplus 27440

DR Deferred Tax Liability 11760

CR Land 39200

2. DR Accumulated Impairment Loss    17600  

DR Impairment Loss    6400

CR Goodwill    24000

3. DR Impairment Loss 448800

CR Accumulated Depreciation & impairment loss

- buildings 204453

CR Accumulated Depreciation & impairment loss

- plant & equipment      219413

CR Accumulated Depreciation & impairment loss

- trademarks 24934

b). P&E wriiten down to $256000. FV less cost of disposal $240000.

No adjusment required cannot written down below fair value but can be carried at an amount

greater than fair value.

The impairment is calculated on the CGU not on individual assets.

As P&E are included in the CGU , they do not independently generate cash flows. Therfore it

is impossible to determine value in use for P&E and cannot determine the recoverable amount.

So, cannot conduct an impairment test on P&E as an individual asset. Hence use a CGU in

relation to the P&E.