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    Tutorial 1 Answer

    Uploaded by

    LYDIA KONG WEI JIE

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    Tutorial 1 Answer

    Uploaded by

    LYDIA KONG WEI JIE
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    15 views3 pages

    Tutorial 1 Answer

    Uploaded by

    LYDIA KONG WEI JIE

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    © All Rights Reserved
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    Chapter 1 Answer

    (a) An impairment review as laid out in IAS 36 impairment of Assets is carried out to determine whether the value
    of an asset may have fallen below its carrying amount in the statement of financial position. It is a requirement
    for goodwill carried in the statement of financial position that it should be tested annually for impairment.
    An asset is considered to be impaired if its carrying amount exceeds its recoverable amount, defined as the
    higher of fair value less costs to sell and value in use. Value in use is the present value of the future cash
    flows which will be generated by the asset. It is often not possible to attribute cash flows to an individual
    asset, so in this case the impairment review is carried out at the level of the cash generating unit to which
    the asset belongs. A cash generating unit is a group of assets which together generate cash flows. For
    instance, a production unit in a factory could be treated as a cash generating unit and any impairment
    identified will be apportioned between the assets of the CGU.
    (b) (i) Carrying amount of the plant at 31.3.X2
    $’000
    1.4.X0 Cost 800,000
    Depreciation ((800,000 — 50,000) / 5) (150,000)
    31.3.X1 Balance 650,000
    Depreciation (150,000)
    31.3.X2 Balance 500,000
    As there is currently no market in which to sell the plant, its recoverable amount will be its value
    in

    use, calculated as:


    Year ended Cash flow Discount factor 10% Present value
    $1000 $’000
    31 March 20X3 220 0.91 200
    31 March 20X4 180 0.83 149
    31 March 20X5 170 + 50 0.75 165
    514
    $’000 $’000 $'000
    Goodwill 1,800 Written off (1,800) —
    Patent 1,200 W/D to realisable amount (200) 1,000
    Factory building 4,000 Working (1,600) 2,400
    Plant 3,500 Working (1,700) 1,800
    Receivables and cash 1,500 No impairment — 1,500
    12,000 (5,300) 6,700

    As this is greater than the carrying amount, the plant is not impaired and will be left at its
    carrying amount of $500,000.
    (ii) The impairment loss will be allocated as follows.

    Working

    The total amount of the impairment loss to be allocated is $5.3m.


    $’000
    The initial write-offs are: Damaged plant 500
    Goodwill 1,800
    Patent 200
    2,500
    This leaves $2.8m impairment loss to be allocated between the factory building (4,000) and the
    remaining plant (3,000). The allocation will be:
    Factory (2,800 x 4,000 / 7,000) 1,600
    Plant (2,800 x 3,000 / 7,000) 1,200
    2,800
    1 A cash-generating unit comprises the following assets:
    $’000
    Building 700
    Plant and equipment 200
    Goodwill 90
    Current assets 20
    1,010

    One of the machines, carried at $40,000, is damaged and will have to be scrapped. The recoverable amount
    of the cash-generating unit is estimated at $750,000.
    What will be the carrying amount of the building when the impairment loss has been recognised?
    (to the nearest $’000)

    A $597,000
    B $577,000
    C $594,000
    D $548,000

    2 What is the recoverable amount of an asset?


    A Its current market value less costs of disposal
    B The lower of carrying amount and value in use
    C The higher of fair value less costs of disposal and value in use
    D The higher of carrying amount and market value
    3 A machine has a carrying amount of $85,000 at the year end of 31 March 20X9. Its
    market value is $78,000
    and costs of disposal are estimated.at $2,500. A new machine would cost $150,000.
    The company which owns the machine expects it to produce net cash flows of
    $30,000 per annum for the next three years. The
    company has a cost of capital of 8%.

    What is the impairment loss on the machine to be recognised in the financial statements at
    31 March 20X9?

    A $7,687
    .B $1,667
    C $2,200
    D $9,500

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