Impairment of a CGU (Cash Generating Unit) Potters Ltd has determined that its fine china division is a CGU. The carrying amounts of the assets at 30 June 2016 are as follows: Factory $210 000 Land...

Impairment of a CGU (Cash Generating Unit)

Potters Ltd has determined that its fine china division is a CGU. The carrying amounts of the assets at 30 June 2016 are as follows:

Potters Ltd calculated the value in use of the division to be $510 000.

Required:

Provide the necessary journal entries for the impairment loss.

Answer:

POTTERS LTD

If recoverable amount is
xxx,
then there is an impairment loss of
xxx.

Assuming the inventory is carried at the lower of costs and net realisable value, the allocation of the impairment loss is as follows:

                                                  Carrying             Proportion              Allocation                                          Net Carrying

                                                  Amount                                                    of Loss                                                  Amount

           Factory

           Land

           Equipment

Journal entry:

           Impairment loss                                                                               Dr

                      Accumulated depreciation and impairment

                      losses – factory                                                                      Cr

                      Accumulated impairment losses – Land                           Cr

                      Accumulated depreciation and impairment

                      losses – equipment                                                               Cr

           (Allocation of impairment loss)

Question 7      IMPAIRMENT LOSS, GOODWILL

On 1 January 2012, Bad Ltd acquired all the assets and liabilities of Wolf Ltd.

Wolf Ltd has several operating divisions, including one whose major industry is the manufacture of toy trains, particularly those of historical significance.

The toy trains division is regarded as a CGU. In paying $2 million for the net assets of Wolf Ltd, Bad Ltd calculated that it had acquired goodwill of $240 000.

The goodwill was allocated to each of the divisions, and the assets and liabilities acquired measured at fair value at acquisition date.

At 31 December 2014, the carrying amounts of the assets of the toy train division were:

There is a declining interest in toy trains because of the aggressive marketing of computer-based toys, so the management of Bad Ltd measured the value in use of the toy train division at 31 December 2014, determining it to be $423 000.

Required:

Prepare the journal entries to account for the impairment loss at 31 December 2014.