Question

At 30 June 2019, Boxes Ltd reported the following assets.

Land	$50 000
Plant	250 000
Accumulated Depreciation	(50 000)
Goodwill	8 000
Inventories	40 000
Cash	2 000

All assets are measured using the cost model.
At 30 June 2019, the recoverable amount of the entity, considered to be a single CGU, was $272 000.
For the period ending 30 June 2020, the depreciation charge on plant was $18 400. If the plant had not been impaired the charge would have been $25 000.
At 30 June 2020, the recoverable amount of the entity was calculated to be $13 000 greater than the carrying amount of the assets of the entity. As a result, Boxes Ltd recognised a reversal of the previous year’s impairment loss.

Required

Prepare the journal entries relating to impairment at 30 June 2019 and 2020.

Answer 1

Impairment in 30 June 2019

Recoverable amount = $272,000

Carrying Value = $50,000 + $250,000 - $50,000 + 8,000 + $40,000 + $2,000 = $300,000

Since the carrying value exceeds the Recoverable amount Impairment of $300,000 - $272,000 = $28,000 needs to be recognized.

Of this $8,000 will directly be impaired from goodwill. The remaining $20,000 will be reduced on prorata basis from the other assets excluding cash and inventory in the following manner:

Total Other Assets excluding cash and inventory = 2,90,000

Impairment on Land = 50,000/250,000 X 20,000 = 4,000

Impairment on Plant = 200,000/250,000 X 20,000 = 16,000

The Journal Entry would be:

		Debit	Credit
30-Jun-19	Impairment Loss	28,000
	Goodwill		8,000
	Land		4,000
	Plane		16,000

Impairment in 30 June 2020

The Carrying Amount of the entity on 30 Jun 2019 would be 272,000 - 18,400 = $253,600

Impairment to be reversed is 13,000. Goodwill once impaired, cannot be reversed as per IAS36. Hence this reversal will be done on Land and Plant.

On Pro Rata Basis we would divide this as:

Plant = $200,000/$250,000 X 13,000 = 10,400

Land = 13,000 - 10,400 = $2,600

However,

If Plant had not been impaired its carrying value would have been $250,000 - $50,000 - $25,000 = $175,000

The Current Carrying Valye of Plant is $250,000 - $50,000 - $16,000 - $18,400 = $165,600
Hence the maximum reversal that can be made on Plant is $9,400

Hence the Remaining $3,600 is reversed on land(maximum reversal on land is $4,000)

Hence The reversal entry is:

		Debit	Credit
30-Jun-20	Land	3,600
	Plant	9,400
	Reversal of Impairment Loss		13,000