Question

Impairment of assets Foodie Ltd has two separate cash generating units, ‘Fizzy Drinks’ and ‘Ice creamery’. At 30 June 2018, the carrying amounts of the assets of the units, valued pursuant to the cost model, are as follows: Fizzy Drinks Ice creamery $ $ Cash 18,000 14,000 Inventory 34,000 25,000 Fixtures and fittings 25,000 35,000 Accumulated depreciation – fixtures and fittings (5,000) (10,000) Equipment 165,000 25,000 Accumulated depreciation – equipment (55,000) (15,000) Land and buildings 650,000 185,000 Accumulated depreciation – buildings (25,000) (6,000) Patent 25,000 - Goodwill 40,000 15,000 Total 872,000 268,000 The inventory is recorded at the lower of cost and net realisable value. The patent has a fair value less costs to sell of $20,000. The land and buildings of ‘Fizzy Drinks’ have a fair value less costs to sell of $620,000, and the land and buildings of ‘Ice creamery’ have a fair value less costs to sell of $175,000. On 30 June 2018, the directors of Foodie Ltd estimate that the fair value less cost to sell for ‘Fizzy Drinks’ and ‘Ice creamery’ amount to $750,000 and $260,000 respectively. The value in use of ‘Fizzy Drinks’ and ‘Ice creamery’ are estimated at $810,000 and $240,000 respectively. Required: Determine the impairment loss (if any) to be recognised by Foodie Ltd for each of its cash generating units as at 30 June 2018, and determine how the impairment loss (if any) is to be allocated. Prepare the journal entries to account for the impairment loss/losses (if any). Show all workings and provide references to the relevant accounting standard to support your answer. Marking Guide - Question 5 Max. marks awarded Application of the impairment test and allocation of impairment losses where necessary, with explanations, workings and references 12 Journal entries 4 Rationale back to top This assessment task will assess the following learning outcome/s: be able to prepare basic financial statements for reporting entities. be able to discuss critically and comprehensively the statutory and professional requirements upon which published financial statements are based. be able to explain the form and content of financial statements. be able to interpret and apply generally accepted accounting principles and specific financial reporting standards relating to concepts of recognition, measurement, disclosure, revaluation and impairment of key financial statement elements

Answer 1

Under IFRS,

An asset is impaired when its carrying value exceeds the recoverable amount.

the recoverable amount is greater of its fair value less any selling expenses and its value in use.

	Fizzy Drinks	Ice Creamery
Fair value	$   7,50,000	$      2,60,000
value in use	$   8,10,000	$      2,40,000
Recoverable amount	$   8,10,000	$      2,60,000
Carrying value	$   8,72,000	$      2,68,000
Impairment loss	$       62,000	$            8,000

impaiment loss if any is allocated to first intengible asset with indefinite lives. Hence, impairment loss will be first allocated to goodwill.

remainning impairment loss will be allocated in ratio of fairvalue of assets.

	Furniture & Fixture	Equipments	Land and Building	Patent	total
fair value	$ 20,000	$    1,10,000	$ 6,20,000	$ 20,000	$ 7,70,000
Impairment loss	$ 571	$          3,143	$ 17,714	$        571	$     22,000

Journal Entry

Imairment Loss	$       70,000
To Goodwill - Ice Creamery		$            8,000
To Goodwill - Fizzy Drinks		$          40,000
To Furniture & Fixture - Fizzy Drinks		$ 571
To Equipmets - Fizzy Drinks		$            3,143
To Land and building - Fizzy Drinks		$          17,714
To Patents - Fizzy Drinks		$ 572
(Being impairment loss recorded)