Question

Impairment of assets Gadgets Ltd has a division that represents a separate cash generating unit. At 30 June 2016, the carrying amounts of the assets of the division, valued pursuant to the cost model, are as follows: Assets: $ Cash 242,000 Plant and equipment 600,000 Less: accumulated depreciation (200,000) Land 800,000 Inventory 190,000 Accounts receivable 67,000 Patent 200,000 Goodwill 10,000 Carrying amount of cash generating unit 1,909,000 The receivables were regarded as collectable, and the inventory’s fair value less costs to sell was equal to its carrying amount. The patent has a fair value less costs to sell of $180,000, and the land has a fair value less costs to sell of $780,000. The directors of Gadgets estimate that, at 30 June 2016, the fair value less costs to sell of the division amounts to $1,750,000, while the value in use of the division is $1,840,000. As a result, management increased the depreciation of the plant and equipment from $40,000 p.a. to $45,000 for the year ended 30 June 2017. By 30 June 2017, the recoverable amount of the cash generating unit was calculated to be $20,000 greater than the carrying amount of the assets of the unit. Required: Determine how Gadgets Ltd should account for the results of the impairment test at 30 June 2016 and 30 June 2017, and prepare any necessary journal entries. Show all workings and provide references to the relevant accounting standard to support your answer. Expert Answer

Answer 1