Impairment of Goodwill and Assets

The assignment focuses on calculating goodwill impairment loss and allocating the remaining impairment to identifiable assets within a Cash Generating Unit (CGU). It presents two scenarios: an initial acquisition where goodwill is recorded, followed by a subsequent impairment scenario with detailed journal entries, calculations, and asset-specific allocations. The solution emphasizes the step-by-step process of identifying recoverable amount, comparing it to carrying value, and applying the impairment loss proportionally across assets.

Solution-1
Depreciation is a non-cash expense for the organisation and hence do not impact cash flow. However, to
prepare true and fair view of financial statements, it is necessary to estimate the amount of depreciation
correctly. Following information is required for estimating the depreciation amount for any asset:
a) Cost of asset
b) Useful life of asset
c) Residual value of asset after useful life
Explanation of above elements is given below:
a) Cost of asset – It includes cost of purchase, freight charges, installation charges, custom duty,
etc. paid to bring the asset to its present location so that it can be used. It is very important to
calculate cost of asset correctly as depreciation calculation is majorly depended upon this element
(Bragg and Bragg, 2017). For example, if a machinery is purchases, cost of asset would include
amount paid to supplier, freight charges to bring machinery to factory and its installation charges
to make the machine functional.
b) Useful life of asset – Useful life refers to the period during which asset will be used by the
organisation. It is an estimated period during which organisation estimates that asset will serve
the organisation. After this period, asset is retired and sold or scraped. Depreciation of any asset
is charged during the useful life (Bragg and Bragg, 2017).
c) Residual Value of asset after useful life – Residual value refers to the amount which
organisation expects from the sale of asset. In some cases, asset is scrapped, so there will not be
any residual value. However, in most of the cases, after useful life, asset is sold off. This amount
is deducted from the cost of asset to arrive at the amount which is to be charged as depreciation
over the useful life of the asset.
References:
Bragg, S. and Bragg, S. (2017). Which costs to assign to a fixed asset. [online] AccountingTools. Available at:
https://www.accountingtools.com/articles/which-costs-can-i-assign-to-a-fixed-asset.html [Accessed 8 Oct. 2017].
Bragg, S. and Bragg, S. (2017). Useful life. [online] AccountingTools. Available at:
https://www.accountingtools.com/articles/2017/5/11/useful-life [Accessed 8 Oct. 2017].

Journal Entries in the books of Midnight Boil Ltd.
Date Particulars Debit Credit
30-Jun-18 Capital Work in Progress A/c 12,550,000
To Cash A/c 12,550,000
(To record expenses incurred for construction)
30-Jun-18 Capital Work in Progress A/c 4,001,500
To Cash A/c 4,001,500
(To record expenses incurred for construction)
01-Jul-18 Nuclear Power Generator A/c 16,551,500
To Capital Work in Progress A/c 16,551,500
(Construction completed and asset recognised)
01-Jul-18 Nuclear Power Generator A/c 809,641*
To Provision for Asset Retirement Obligation A/c 809,641
(Provision for dismantling cost recorded)
30-Jun-19 Interest expense A/c 80,964
To Provision for Asset Retirement Obligation A/c 80,964
(Interest expenses incurred on dismantling cost
recorded)
30-Jun-24 Interest expense A/c 130,393**
To Provision for Asset Retirement Obligation A/c 130,393
(Interest expenses incurred on dismantling cost)
*(2,100,000/ (1 + 10%)10)
** Calculation of Interest expenses
Date Interest expenses Provision for ARO
30-Jun-
18 - 809,641
30-Jun-
19 80,964 890,605
30-Jun-
20 89,060 979,665
30-Jun- 97,967 1,077,632

21
30-Jun-
22 107,763 1,185,395
30-Jun-
23 118,540 1,303,935
30-Jun-
24 130,393 1,434,328
30-Jun-
25 143,433 1,577,761
30-Jun-
26 157,776 1,735,537
30-Jun-
27 173,554 1,909,091
30-Jun-
28 190,909 2,100,000
Solution – 3
(a) Calculation of Gross Profit
Particulars 2015 2016 2017
Contract Price 50,000,000 50,000,000 50,000,000
Less:
- Cost for the year 10,000,000 28,000,000 40,000,000
- Estimated costs to complete 28,000,000 12,000,000 -
Total 38,000,000 40,000,000 40,000,000
Estimated Profit 12,000,000 10,000,000 10,000,000
Percentage completed 26.32% 70.00% 100.00%
Profit recognised for the
year 3,157,895 3,842,105 3,000,000
(b) Journal entries for the 2015 financial year using the percentage-of-completion method
Particulars Debit Credit
Construction in progress A/c
10,000,00
0
To Expenses A/c 10,000,000
(To record expenses incurred for construction)
Construction in progress A/c 3,157,895
Construction expenses A/c 10,000,00

0
To Income from Contract A/c 13,157,895
(To record income and profit from the construction
contract)
Accounts receivable A/c
12,000,00
0
To Construction in progress A/c 12,000,000
(Bill raised against construction contract)
Cash A/c
11,000,00
0
To Accounts receivable A/c 11,000,000
(Amount received)
(c) Journal entries for the 2015 financial year, assuming the stage of completion cannot be
reliably assessed
Particulars Debit Credit
Construction in progress A/c
10,000,00
0
To Expenses 10,000,000
(To record expenses incurred for construction)
Construction expenses
10,000,00
0
To Income from Contract 10,000,000
(To record income from the construction contract)
Accounts receivable A/c
12,000,00
0
To Construction in progress A/c 12,000,000
(Bill raised against construction contract)
Cash A/c
11,000,00
0
To Accounts receivable A/c 11,000,000
(Amount received)
Construction in progress A/c 2,000,000
To Contract Liability A/c 2,000,000
(Amount billed over cost of construction recognised as
liability)

Solution- 4
(a)
Date Particulars Debit Credit
30-Jun-19 Impairment Loss 800,000
To Accumulated Impairment Loss - Goodwill 800,000
(Impairment loss recorded)
Working
Particulars 1st Jul-18
30th Jun-
19
Consideration Paid 7,000,000 6,200,000
Less: Carrying value of the net identifiable assets 5,800,000 5,800,000
Goodwill recorded 1,200,000 400,000
Impairment loss (1,200,000 – 400,000) 800,000
(b)
Date Particulars Debit Credit
30-Jun-19 Impairment Loss 2,200,000
To Accumulated Impairment Loss - Goodwill 1,200,000
To Customer List 8,333
To Machinery 241,667
To Buildings 250,000
To Land 500,000
(Impairment loss recorded)
Working:
As on 30th Jun-19
Recoverable amount of CGU 4,800,000
Less: Carrying value of the net identifiable assets including
goodwill 7,000,000

Impairment Loss
(2,200,000
)
Impairment loss is first applied to goodwill. Then, if any, balance remaining is shared by other assets in
their ratio.
Impairment loss 2,200,000
Less: Goodwill to be written off 1,200,000
Balance to be written off 1,000,000
Particulars
Carrying
Amount Ratio of Assets Impairment Loss charged
Customer List 50,000 0.83% 8,333
Machinery 1,450,000 24.17% 241,667
Buildings 1,500,000 25.00% 250,000
Land 3,000,000 50.00% 500,000
6,000,000 100.00% 1,000,000