Impairment Loss Computation and Allocation

The assignment content presents the computation of impairment losses for two cash-generating units (CGUs): Cinema and DVD sales. The recoverable amount is calculated as the higher value between fair value less cost to sell and value in use. The impairment loss for each CGU is then allocated to its components: license, land and building, and goodwill. The journal entries are also provided, reflecting the recognition of impairment losses and the corresponding accumulated impairment loss.

FINANCIAL REPORTING
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Table of Contents
ASSESSMENT 3..................................................................................................................................3
Question 1: Financial statement disclosure.....................................................................................3
Question 2 Accounting for share capital..........................................................................................5
Question 3 Accounting for income taxes.........................................................................................6
A) Current tax liability of Asset.......................................................................................................6
Deferred tax liability of Asset..........................................................................................................6
B) journal entries.............................................................................................................................7
Deferred tax liability........................................................................................................................7
Deferred tax asset.............................................................................................................................7
Question 4 Property, plant and equipment.......................................................................................8
Question 5 Impairment loss and its allocation...............................................................................10
REFERENCES...................................................................................................................................12
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ASSESSMENT 3
Question 1: Financial statement disclosure
(a)
According to IAS 6 depreciation accounting which states that any changes takes place in
the depreciation amount due to change in number of years of asset held by an enterprise will
prospectively affect and not retrospectively (Gomoi and Pantea, 2016). In the given case scenario,
the change in number of years of asset from 10 years to 6 years on 1st July then the financial
statements of 2013 and 2014 are not affected as the change takes place in 2015.
Calculation of depreciation
2013
Asset value= $500,000
Number of years= 10 years
Residual value= Nil
Depreciation= $500,000/10= $50,000
2014
$50,000
2015
Depreciation= $500,000/6= 83333
It is disclosed in prior period items in balance sheet as per IAS 5 where any change is takes
place before finalisation of balance sheet.
(b)
According to International accounting standards 4, contingencies and events occurring
after the balance sheet date states that this should be disclosed in the as the invoice received in July
2016 (Preferred tax, 2016). The adjustments need to be made in 2015 followed by 2016.
Journal entry
Account Debit Credit
Accounts payable $25000
To inventory $25000
Bank $7500
To tax refund $7500
Bank $25000
To Accounts payable $25000
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The tax refund is added into the profit of an enterprise and this is to be disclosed in balance
sheet defining the nature of these transactions.
(c)
As per accounting standards 10 of fixed asset accounting the shares of an enterprise are
showed at their gross value or book value and doesn't affect due to change in market price. In the
given situations, the share price will be shown as $800,000 instead of $4,50,0000 as the standard
form of presentation is on the book value system (Pillewar, 2016).
(d)
In this situation, the debt is irrecoverable from the debtor due to bankruptcy of the debtor. It
is treated as debt expenses for an enterprise in the form of bad debt. Following are the accounting
treatment of this transaction in two ways is:
Irrecoverable debt= $450,000*50%= $225000
Income statement
Particulars Amount
Sales ********
- bad debt $2250000
This will reduce the total amount of profit and their journal entry are given below:
Profit and loss A/c Dr. $ 2250000
To bad debts a/c $2250000
Extract of Balance sheet
Liabilities Assets
Accounts receivable $450000
- bad debt allowance $225000
$2250000
Journal entry
Account Debit Credit
Bad debt expense 225000
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Allowance for doubtful debts 225000
Question 2 Accounting for share capital
Date particulars Debit Credit
31 Jan, 2016 Bank a/c Dr. $18,900,000.00
To ordinary share application a/c $18,900,000.00
(Application money received on 6,300,000 shares @ 3
each share)
31 Jan, 2016 Ordinary share application a/c Dr. $18,900,000.00
To ordinary share capital a/c $18,000,000.00
To ordinary share allotment a/c $900,000.00
(Application money transferred to share capital and
excess adjusted towards the allotment)
31 Jan, 2016 Bank a/c Dr. $30,000.00
To share Options a/c $30,000.00
(Issue of 60000 options purchased @ 50c each)
12 February,
2016 Ordinary share allotment a/c Dr. $6,000,000.00
To share capital a/c $6,000,000.00
(Allotment money due)
12 March, 2016 Bank a/c Dr. $5,083,000.00
To share allotment a/c $5,083,000.00
(Amount received on allotment)
20 March, 2013 Share capital a/c Dr. $80,000.00
To share allotment a/c $17,000.00
To share forfeited a/c $63,000.00
(20000 shares were forfeited)
5th April, 2016 Bank a/c Dr. $74,000.00
Share forfeiture a/c Dr. $6,000.00
To share capital a/c $80,000.00
(Re-issue of 20000 forfeited shares @ 4.00 fully paid-
up)
5th April, 2016 Re-issue expenses a/c Dr. $3,600.00
To bank a/c $3,600.00
(cost of share re-issuing worth 3600 paid)
5th April, 2016 Ordinary share holder a/c Dr. $53,400.00
To share capital a/c $53,400.00
(Excess money paid back to the shareholder)
30th June, 2016 Bank a/c Dr. 210000
Loss on issue of shares a/c Dr. 30000
To share capital a/c 240000
(Issue of 50000 options @ 4.20 as a result of options
exercised)
30th June, 2016 Share options a/c Dr. $30,000.00
To share capital a/c $25,000.00
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To lapsed options reserve a/c $5,000.00
(write off of share options @ 50c with 50000 exercised
and 10000 lapsed option)
Working note: 1
Calculation of amount adjusted on allotment on 20000 shares
Shares applied 6000000
Shares allotted 6300000
Shares allotted to failure investor 20000
Share applied 21000
Amount adjusted on allotment (In Dollar) 3000
Working note: 2
Calculations of amount received on allotment
Allotment money due $6,000,000.00
Less; Amount received on application $900,000.00
Net balance $5,100,000.00
Less: Amount not received $17,000.00
Amount received $5,083,000.00
Question 3 Accounting for income taxes
A) Current tax liability of Asset
Assets Amount Tax rate Tax amount
Cash 20000 30.00% $600
Inventory $85900 30.00% $25770
Accounts receivable 76000 30.00% $22800
Equipment $360,000 30.00% $90,000
Motor vehicle $45000 30.00% $9900
Pre paid insurance $3000 30.00% $900
Liabilities
Accounts payable $50250 30.00% $15075
Loan $25000 30.00% $7500
Deferred tax liability of Asset
Liabilities Amount
Provision for warranties $11000
Provision for annual leave $6900
Rent payable $6000
Asset
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Provision for doubtful debt $4000
Equipment $400,000
Motor vehicle $60,000
Deferred tax liabilities refers to all the liabilities arises where tax relief is provided in advance
of an accounting expense or accrued income but not taxed until received such expenses are
warranties, annual and rent payable which is not available for normal tax deductions due to they are
not received (Deferred tax asset and liabilities, 2015).
Deferred tax asset refers to that asset on which tax relief is provided after an expense is
deducted for accounting expenses such as provision for doubtful debt or provision for depreciation.
B) journal entries
Deferred tax liability
Tax liability a/c Dr $23900
To warranties $11000
To Annual leave $6900
To Rent payable $6000
Deferred tax asset
Tax liability a/c Dr $96000
To allowance for bed debt $4000
To provision for depreciation(Equipment) $80000
To Provision for depreciation(Motor vehicle) $12000
Current tax liability
Particulars Debit Credit
Tax liability $172545
Cash $600
Inventory $25770
Accounts receivable $22800
Equipment $90,000
Motor vehicle $9900
Pre paid insurance $900
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Accounts payable $15075
Loan $7500
Question 4 Property, plant and equipment
Date Particulars Debit Credit
1-Jul-13 Equipment a/c Dr. $800,000.00
To cash a/c $800,000.00
(Purchase equipment worth 800000 dollar)
30-Jun-14 Depreciation a/c Dr. $152,000.00
To equipment a/c $152,000.00
(Depreciation charged as per straight line method on
original cost)
30-Jun-14 Equipment a/c Dr. $82,000.00
To revaluation surplus $82,000.00
( Equipment revaluated at 730,000)
30-Jun-15 Depreciation a/c Dr. $115,000.00
To equipment a/c $115,000.00
(Depreciation charged on revalued price)
30-Jun-16 Depreciation a/c Dr. $115,000.00
To equipment a/c $115,000.00
(Depreciation charged as per straight line method)
30-Jun-16 Revaluation surplus A/c Dr. $82,000.00
Impairment loss a/c Dr. $18,000.00
To Equipment a/c $82,000.00
To accumulated impairment losses a/c $18,000.00
(Fair value of the assets revalued at 400000)
30-Sep-16 Depreciation a/c Dr. $28,750.00
To equipment a/c $28,750.00
(Depreciation charged for 3 months)
30-Sep-16 Bank a/c Dr. $390,000.00
To equipment a/c $371,250.00
To profit (profit on sale of equipment) $18,750.00
(Assets sold at a profit of 18750, transferred to P&L a/c)
30-Sep-16 Taxation a/c Dr. $5,625.00
To cash a/c $5,625.00
(Taxes paid @ 30%)
30-Sep-16 P&L a/c Dr. $5,625.00
To cash a/c $5,625.00
(Taxed amount transferred to profit and loss account)
Working note: 1
Depreciation as per cost model
Cost of equipment $800,000.00
Residual value $40,000.00
Estimated life 5
Depreciation $152,000.00
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Carrying value of assets $648,000.00
Working note: 2
Revaluation model
Revaluated value of equipment on 30 June 2014 $730,000.00
Carrying value $648,000.00
Upward adjustment $82,000.00
Working note: 3
Depreciation after revaluation on 30th June, 2014
Revaluated value of assets $730,000.00
Residual value $40,000.00
Estimated useful life 6
Depreciation $115,000.00
Working note: 4
Carrying value of assets on 30th June, 2016
Revaluated value of equipment on 30 June 2014 $730,000.00
less: depreciation for 2015 $115,000.00
Carrying value of equipment on 30 June, 2015 $615,000.00
less: depreciation for 2016 $115,000.00
Carrying value of equipment on 30 June, 2016 $500,000.00
Working note: 5
Differences between carrying value and revaluated price on 30th June, 2016
Carrying value of equipment on 30 June, 2016 $500,000.00
revaluated value $400,000.00
Downward adjustment $100,000.00
Working note 6:
Calculation of depreciation for 3 months
Depreciation for the year $115,000.00
Depreciation till 30th September, 2016 $28,750.00
Working note: 7
Calculation of carrying value of equipment on 30th September, 2016
Value of equipment on 30th June, 2016 $400,000.00
Depreciation till 30th September, 2016 $28,750.00
Carrying value $371,250.00
Working note: 8
Calculation of profit and loss on disposal
Sales value of assets $390,000.00
Less; Carrying value $371,250.00
Profit on disposal $18,750.00
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Question 5 Impairment loss and its allocation
According to International Accounting Standard (IAS) 36, is applicable on impairment of
assets. The excess of carrying amount over the recoverable value of the assets is called impairment
loss. The main reason for the impairment are changes in market conditions, introduction of new
legislation, enforcement of regulations and decline in assets functionality, especially because of
aging. As per the IAS, it is important for the director of Movie ltd to determine the fair market value
of the underlying assets. In such respect, recoverable value is the net receivable amount which is
usually calculated by fair market values less of cost to sell (IAS 36 Impairment of Assets, 2015).
However, if the value in use is higher than fair market value than, this value will be consider as the
recoverable value of the assets. It is the price which entity can gather by disposing off the assets in
the real market. Thereafter, it must be compared with the carrying value, if it is above than fair
market value than such assets will be considered impaired by difference amount. Impairment of
assets can be identified using either the cost or revaluation model. Besides this, value in use of the
assets can be calculated by forecasting both the cash inflows and outflows from the assets. In the
given case, for the Cash Generating Units (CGU), named Cinema and DVD sales, impairment loss
are computed here as under:
Cash generating units
Particulars Cinema DVD sales
Total carrying amount of CGU $1,019,000.00 $326,000.00
Recoverable amount
Fair value less cost to sell $780,000.00 $318,000.00
Value in use $900,000.00 $290,000.00
Recoverable amount (whichever is higher between (a) and
(b)) $900,000.00 $318,000.00
Impairment loss $119,000.00 $8,000.00
Allocation of impairment loss of Cinema
Particulars License
Land and
building Goodwill Total
Carrying value $25,000.00 $625,000.00 $45,000.00 $1,019,000.00
less: Recoverable amount
(fair value-cost to sell) $24,000.00 $550,000.00 $2,000.00 $900,000.00
Impairment loss $1,000.00 $75,000.00 $43,000.00 $119,000.00
Journal entry:
Impairment loss a/c Dr. $119,000.00
To accumulated impairment loss a/c $119,000.00
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Allocation of impairment loss of DVD sales
Particulars
Land and
building Goodwill Total
Carrying value $179,000.00 $15,000.00 $326,000.00
less: Recoverable amount
(fair value-cost to sell) $175,000.00 $11,000.00 $318,000.00
Impairment loss $4,000.00 $4,000.00 $8,000.00
Impairment loss a/c Dr. $8,000.00
To accumulated impairment loss a/c $8,000.00
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REFERENCES
Books and Journals
Gomoi, B. C. and Pantea, M. F., 2016. A Practical point of view for the alternative valuation
treatments. Lucrări Științifice Management Agricol. 18(2). pp. 203-215.
Pillewar, U. R., 2016. Effects of Restriction on Use of Depreciation Method in Income Tax Act as
Compared to Companies Act in the Industry. Global Journal For Research Analysis. 5(1).
pp. 16-23.
Online
Deferred tax asset and liabilities. 2015. [Online]. Available through:
<http://yourfinancebook.com/deferred-tax-asset-and-deferred-tax-liabilities/> [Accessed on
21st September 2016].
IAS 36 Impairment of Assets. 2015. [Online]. Available through: <
http://www.iasplus.com/en/standards/ias/ias36>. [Accessed on 21st September 2016].
Preferred tax. 2016. [Online]. Available through: <http://taxguru.in/income-tax/deferred-tax-entry-
books.html> [Accessed on 21st September 2016].
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