Question

On 1 July 2017, Lollipop Ltd acquired all the assets of Star Ltd. The directors of Lollipop Ltd has determined that Star Ltd is a cash-generating unit in its own right and that Star Ltd may be impaired for the year ending 30 June 2018. The carrying amounts of the assets of this cash-generating unit, valued pursuant to the cost model, are as follows:

Assets $ Cash and cash equivalents 10,000

Motor vehicles 500,000

Less: accumulated depreciation (100,000)

Land 200,000

Inventory 15,000

Goodwill 25,000

Carrying amount of cash-generating unit 650,000

The directors of Lollipop Ltd estimate that, at 30 June 2018, the fair value less costs to sell of the cash-generating unit amounts to $540,000, while the value in use is $590,000. The inventory is recorded at lower of cost and net realisable value. The land has a fair value less costs to sell of $190,000.

Required:

Prepare any necessary journal entries to recognise the impairment loss. Show all workings and provide explanations to support your answer where necessary.

Question 4	Max. marks allocated
Journal entries	2
workings and explanation	7
Presentation	1
Total	10

Answer 1

Assets			Liabilities and Equity
Cash & equivalents	$         10,000		Liability	$                 -
motor vehicles	$      500,000		Book value of equity	$      650,000
less depreciation	$     (100,000)
Net motor vehicles	$      400,000
Land	$      200,000
Inventory	$         15,000
Goodwill	$         25,000
Total assets	$      650,000		Total Liabilities and Equity	$      650,000
Value in use	$      590,000
Fair value less costs of sell	$      540,000
lower of two values	$      540,000
Land revaluation (200000-190000)	$       (10,000)
Actual value after revalation (540000-10000)	$      530,000
Carry value	$      650,000
Impairment (650000-530000)	$      120,000