In: Accounting
At the end of 2020, Bridgeport Corporation owns a licence with a remaining life of 10 years and a carrying amount of $528,000. Bridgeport expects undiscounted future cash flows from this licence to total $532,500. The licence’s fair value is $423,000 and disposal costs are estimated to be nil. The licence’s discounted cash flows (that is, value in use) are estimated to be $477,700. Bridgeport prepares financial statements in accordance with IFRS. Determine if the licence is impaired at the end of 2020. The licence at the end of 2020. Prepare any related entry that is necessary. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit Assume the recoverable amount is calculated to be $450,700 at the end of 2021. Determine if the licence is impaired at the end of 2021. The licence at the end of 2021. Prepare any related entry that is necessary. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit
Impairment Loss = Carrying Amount (-) Recoverable Amount
Whereas Recoverable Amount is higher of Value in use and Fair Value less cost to dispose.
And Value in Use means the present value of the future cash flows expected to be derived from an asset or cash-generating unit.
At the end of 2020:-
Value in use of the license = Discounted Cash Flows expected in future = $477,700
Recoverable Amount = Higher of 1) Value in use = $477,700 and 2) Fair Value Less Cost to dispose = $423,000
Recoverable Amount = $477,700
Therefore, Impairment loss = $528,000 - $477,700 = $ 50,300
Journal Entry for impairment loss on 31st December 2020 would be
Date | Account Titles and Description | Debit | Credit |
12-31-2020 | Impairment Loss Account | 50,300 | |
License | 50,300 | ||
(Being Impairment Loss on License recorded) |
At the end of 2021:-
Carrying amount of License as on 01-01-2021 = $528,000 - $50,300 = $477,700
Amortisation amount for the year 2021 = $477,700/10 years = $47,770
Carrying amount as on 31st December 2021 = $477,700 - $47,770 = $429,930
Recoverable Amount of License as on 31st December 2021 = $450,700
As Carrying amount is less than recoverable amount, no impairment is required for the year 2021.