Question

In: Accounting

Impairment of assets Gadgets Ltd has a division that represents a separate cash generating unit. At...

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.

Solutions

Expert Solution

Impairment loss on June 30, 2016
Goodwill 10000
Land 20000
Patent 20000
Plant & Equipment 19000
Total impairment Loss 69000
Reversal of Impairment loss on plant and equipment on June 30, 2017
Prohibited in US GAAP but allowed in IFRS
Amount in $
Date General Journal Debit Credit
As per US GAAP & IFRS
June 30, 2016 Impairment loss 69000
Goodwill 10000
Land 20000
Patent 20000
Plant & Equipment 19000
To record the Impairment loss on assets
As per only IFRS as US GAAP does not allow Reversal of impairment loss.
June 30, 2017 Plant & Equipment 15000
Accumulated depreciation on plant & Equipment 5000
Impairment Loss 20000
To record the reversal of impariment loss.
The Relevent Accounting standard
IFRS IAS-36
US GAAP ASC 820-10
US GAAP ASC 360-10-35-20

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