Impairment Loss Calculation and Journal Entry

This accounting assignment focuses on calculating an impairment loss for a company's plant and land assets. It requires students to determine the total impairment amount, allocate it between the assets based on their carrying amounts, and record the impairment loss in the accounting system through a journal entry. The assignment also provides specific values for asset carrying amounts, goodwill, and the total impairment loss.

Finance Questions
03

Table of Contents
QUESTION 1...................................................................................................................................2
a) .................................................................................................................................................2
b) .................................................................................................................................................3
c) .................................................................................................................................................3
d) .................................................................................................................................................4
e) .................................................................................................................................................4
QUESTION 2...................................................................................................................................4
QUESTION 3...................................................................................................................................7
b)..................................................................................................................................................9
QUESTION 4...................................................................................................................................9
QUESTION 5.................................................................................................................................12
a) ...............................................................................................................................................12
b) ...............................................................................................................................................14
REFERENCES..............................................................................................................................15
03

QUESTION 1
a)
According to Accounting standards board 110 which is concerned with all kinds of
transactions or events occurred in the financial statements or business after the reporting period.
There are two kinds of events takes places in the business which needs to be identified by an
entity in order to classify all kinds of transactions such as adjusting events or non-adjusting
events takes places in an entity.
In the give case scenarios, this particular transactions belongs to adjusting events as these
transactions exists in the balance sheet at the end of reporting period at 30 June 2016.
Accounting treatment
Abnormal loss a/c Dr 1750,000
To stock lost due to fire 1750,000
(being stock damaged due to fire transferred to abnormal loss)
Insurer a/c Dr 1500,000
Loss on stock a/c Dr 2,50,000
To night club 1750,000
Bank a/c Dr 1500000
To Insurer 1500000
(being insurance claim received)
Profit entities will use AASB 110 which is concerns with considering all the events
occurring after the reporting period. This standard says that any event whether favorable or
unfavorable occurred after reporting period or before finalization of balance sheet which in the
current case fire destroy the stock on 25th August 2016. This transaction is related to non-
adjusting event as conditions lies initially in the business that this particular transactions will
occur in the future are regarded as the non-adjusting events. The reason behind taking these
transactions as non-adjusting event as this reduces the fair market value between the end of the
reporting period.
03

b)
As per IAS 10 which deals with the processing of all kinds of business transactions
incurred in an entity that incurred in the business after the date of balance sheet. Adjusting and
non-adjustments of all the transactions ill be decide by an entity using various parameters.
Adjusting events will be ascertained by an entity on a parameter that any kind of evidence of
events take places after balance sheet date exists at the end of reporting period can be adjust in
the financial statements in order to determine the actual performance of an entity. In the current
case scenario, Snapper Ltd has 10% of shares at the end of reporting period which shows that
this particular transactions will be adjust by an entity.
Accounting treatment
The value of shares which will be considered by an entity in the books of accounts is
based on the cost or market value which ever is less. So, in the given case the cost per unit of
share will be taken as $0.50 as cost or $1 as market value whichever is lees that means $0.50 will
be taken into account.
Amount of shares
5000,000*$0.50= $25,00,000
According to AASB 108 which is concerned with the accounting policies, changes in
accounting estimates and errors. Current case of purchasing shares at cost or market value is
based on the accoutering policy need to be used by an entity that is valuation of shares on lower
of costs or market value which in case of cost is 0.50 and market value is 1 that is 5000000
shares will be valued on cost that is 0.50.
c)
According to IAS 10, the current transactions of sale of fishing business which generated
profit will be treated as adjusting events in the current balance sheet of an entity. This particular
transactions is regarded as event occurring after the reporting period which is treated as adjusting
event as this will incur in the business before the finalization of financial statements so this will
include in the income statements of an entity with a profit of $79000.
According to AASB 110 which is related to the events occurring after the reporting
period or before the balance sheet date. This is non- adjusting event as per this particular
standard which is all about considering favorable or non-favorable event. So, in the given case
03

scenario profit generated from the sale of transaction on 5 August are regarded as favorably
adjusting event.
d)
It is regarded as the adjusting event as this particular transactions incurred in the business
as the end of reporting period that is evident that delivery of goods will take places in June and
invoice received on August before finalization of financial statements.
Accounting treatment of the above mention transactions is that invoice of goods received
is of $85000 will be shown in trade receivables and on the other hand $100000 will be treated as
closing stock that will be recorded in the balance sheet as the closing stock incurred in the
business.
It is regarded as the adjusting transactions as this falls under AASB 101 which is
concerned with the presentation of financial statements. The invoice received to company for the
goods delivered in June is regarded as the forward contract. The value of closing stock is
estimated as 100000 as the difference arises of 15000 will be taken into consideration as it is
adjusting events takes places in an entity.
e)
It is adjusting event as the charging of fine for not filing income tax return by an
individual for the previous year 2015 by the assessing officer of Australian taxation officer is of
$55000. It is evident from the above that discrepancy found in the fine charge by the authority at
the end of reporting period that is 30 June 2016 which ascertain the overall status of events
incurred in the business that is to be consider by an entity as adjusting or non-adjusting event for
improving existing business performance of an entity. On later date that is on 12 August fine
charged revised from $55000 to $5000 will be considered by an entity in the books of accounts
in order to reduce the current amount of taxation incurred in the business.
It is related with the AASB 1054, which is concerned with the additional disclosures
made by an entity when sudden facts and figures discovered in the business. This is adjusting
event according to this particular accounting standards. In the current case scenario, wrong
determination of tax by Australian tax officer will affect the condition of an entity as this is
regarded as the material effect. This material effect will be attached at the end of the nonracial
statements as disclosures to accounts for the revision of tax amount from 55000 to 5000.
03

QUESTION 2
Journal entry in the Books of Ketchup Ltd
For the year ended 30 June 2015
Date Particulars Debit( Amount in 000
AUD)
Credit( Amount in
000 AUD)
1-July-2015 Bank a/c Dr 7200
To share application 7200
(Being 4800000 shares
subscribed at $4 per
share are due on
application at $1.50)
Share application a/c
Dr
7200
To Share capital 7200
(Being application
money transferred to
share capital account)
Share allotment a/c Dr 5760
To share capital 5760
(Being the share
allotment money
within one month due
@ 1.20)
Underwriting
commission a/c Dr
15
To Underwriter 15
03

(Being commission
paid to underwriter for
issuing shares)
31-August-2015 Cash a/c Dr 0.6
To underwriter's
commission
0.6
(Being underwriter
commission received
by firm due on 200000
shares
15000*5000000/20000
0)
30-September-2015 Share allotment a/c Dr 5760
To Share application 5760
(being allotment
money received)
31-October-2015 Share final account Dr 6240
To Share capital 6240
(Being 4800000 shares
issued as final call at
$1.30)
30-November-2015 Bank a/c Dr 6110
To share at final call 6110
(Being call money
received except
100000 shares)
03

15-December-2015 Share capital account
Dr
6240
To Shares at final call 6110
To forfeited shares 130
(Being 100000 shares
forfeited by
management for no
payment)
Bank a/c Dr 360
To share capital
account
130
To securities premium 2300
Being 100000 shares
forfeited which will be
reissued at 3.60 out of
which 2.30 is security
premium
Shareholders account
Dr
232
To reissue costs 2
To share security
premium
230
Being reissue expenses
borne by shareholders
and surplus will be
transferred to their
account
Share forfeited
account Dr
130
To capital reserve 130
03

Being forfeited shares
transferred to the
capital reserve account
of Ketchup Ltd
QUESTION 3
Calculation of current tax liability for the year ended 30 June 2016
Plant
Year Companies act
Depreciation
rate Income tax act
Depreciation
rate Difference
Value of Plant 15.00% Value of plant 20.00%
2015 AUD$ 315000
AUD $ 315000
* 15% =
47,250.00 AUD $ 315000
AUD$ 315000
* 20 % =
63,000.00
AUD $
15,750.00
2016 AUD$ 315000 AUD 47250 AUD $ 315000 AUD $ 63000 AUD $ 15750
Deferred
liability 4725
Motor vehicle
Year Companies act
Depreciation
rate Income tax act
Depreciation
rate Difference
Value of motor
vehicle 20.00% Value of plant 15.00%
2015 AUD $ 100000 AUD $ 20000 AUD $ 100000 AUD $ 15000 AUD $5000
2016 AUD $ 100000 AUD $ 20000 AUD $ 100000 AUD $ 15000 AUD $5000
Deferred tax
assets
5000 * 30%
1500
Prepaid insurance
03

2016 2015
Prepaid insurance 3000 1000
Deferred tax assets 3000 * 30% = 900 1000 * 30% = 300
Temporary differences
2015
Taxable temporary differences 11490
Deferred tax assets 11490 * 30% = 3447
Assumptions:
Tax deductions for leave, warranties, doubtful debts and sales revenue are not available as per
the additional information.
S. No Particulars Debit Credit
1. P&L a/c Dr
To deferred tax
liability related to
plant a/c
4725 4725
2. Deferred tax assets
(Motor vehicles) a/c
To P&L a/c
1500 1500
3. Deferred tax assets
(prepaid insurance)
a/c Dr
To p & l a/c
300 300
4. Deferred tax assets
a/c Dr
3447 3447
03

To p & l a/c
b)
QUESTION 4
Motor Vehicle 1
Date Particulars Debit Credit
1. Depreciation a/c
Dr
To accumulated
depreciation a/c
28500
28500
30th June 2016 Motor vehicle
a/c Dr.
To reevaluation
loss a/c
10500
10500
30th June 2017 Motor vehicle a/c
Dr.
To reevaluation
loss a/c
8500
8500
Motor Vehicle 2
Date Particulars Debit Credit
1. Depreciation a/c
Dr
To accumulated
depreciation a/c
28500
28500
30th June 2016 Motor vehicle
a/c Dr.
5000
03

To reevaluation
loss a/c
5000
30th June 2017 Motor vehicle a/c
Dr.
To reevaluation
loss a/c
8000 8000
QUESTION 5
a)
Calculation of recoverable amount
Particular Amount
Fair value less costs to sell A$ 720000
Value in use A$ 810000
Whichever is greater A$ 810000
Calculation of Impairment loss
Particular Amount
Carrying amount A$ 873000
Recoverable amount A$ 810000
Impairment loss A$ 63000
Impairment loss is the amount determined by comparing recoverable amount with the
carrying amount of cash generating unit. The impairment of assets falls under the IAS 36, under
which impairment lies in the assets needs to be removed by an entity by compensating the loss
incurred in the business by passing entry in the books of accounts of the business enterprise.
In the given case scenario, the recoverable amount is ascertained by taken into
consideration the fair value less cost to sales of asset and not singular Fair value less cost to sales
03

of Land as it is mentioned in the act to consider one among both the values in order to determine
the recoverable amount.
Calculation of allocation of Impairment loss among cash generated units
Particular Plant
(ratio: .75)
Land
(ratio: .25)
Goodwill Current asset
(cash +
inventory)
Pre- carrying
value
600,000 200,000 25000 47000
Impairment (28500) (9500) (25000) -
Post carrying
value
571500 190500 0 47000
W.N. 1
Total carrying amount - Total Recoverable amount
= 8730000-810000
Total impairment loss = 63000
Balance to allocate = (Total impairment- goodwill)
= (63000 - 25000)
= 38000
W. N. 2
 Plant= 600000 / 800000 *38000
= 28500 (75% of 38000)
 Land= 200000 / 800000 *38000
= 9500 (25% of 38000)
b)
Particular Debit(in AUD $) Credit (in AUD $)
03

Impairment Loss a/c Dr
To Accumulated impairment
loss
63000
63000
03