Question

Hooper Retailing Ltd (Hooper) operates a high fashion store in the Sydney CBD. Unfortunately, trading conditions have been difficult as customers are increasingly shopping online and Hooper has experienced increasingly poor performance (i.e., there are indicators of impairment).

Below is Hooper’s balance sheet as at 30 June 2018.

Liabilites		Assets
Bank Overdraft	300,000	Cash	10,000
Accounts Payable	500,000	Accounts Receivable	200,000
		Inventory	700,000
Equity	510,000	Property Plant and Equipment - Net	300,000
		Goodwill	100,000
Total	1,310,000		1,310,000

Additional information

Hooper is a single cash generating unit.

The ‘value in use’ of the assets is estimated to be $1,050,000. Separately, an offer to purchase the company (all assets and liabilities) has been received from Pocock Limited for $310,000 immediately before 30 June 2018.

The accounts receivable relate to longstanding customers and it is expected that $195,000 will be recoverable.

Required

Prepare Journal entries to recognise the asset impairment required on 30 June 2018.

Answer 1

Carrying Value of Assets= $1,310,000

Recoverable Amount of Assets: Higher of Fair Value less Costs to sell and Value in Use:

1. Value in Use = 1,050,000
2. Fair Value Less Costs to Sell = (310,000 + 300,000 + 500,000) = $1,110,000

So Recoverable Amount is $ 1,110,000

Impairment Loss of Hooper = 1,310,000 – 1,110,000 = $200,000

This impairment loss will be allocated firstly to Goodwill ($100,000) and rest $100,000 to other assets in ratio of their carrying value except cash and inventory (Because inventory is always valued at cost or recoverable amount whichever is lower)

Asset	Carrying Value	Proportion	Allocation of Loss	Net Carrying Amount
Accounts Receivable	200000	2/5	40000	160000
PPE	300000	3/5	60000	240000

As the recoverable amount from receivables is $195,000, therefore receivables can’t be written down to an amount less than this figure. So maximum loss allocable to receivables is $5,000 and rest $35,000 must be allocated to other assets i.e. PPE

Journal Entry

Date	Accounts Title	Debit	Credit
	Impairment Loss	200000
	Goodwill		100000
	Accumulated Depreciation and Impairment Loss - PPE		95000
	Allowance for Doutful Debts		5000
	(To record allocation of impairment loss)

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