Calculating Impairment Loss on CGU

This assignment focuses on calculating an impairment loss for a Cash Generating Unit (CGU). It presents a scenario where the recoverable amount of the CGU is lower than its carrying value. The steps involved in identifying the impairment, allocating the loss to goodwill and other assets, and recording the journal entry are outlined. The example utilizes specific figures to illustrate how the impairment loss is calculated and distributed among different asset categories within the CGU.

Solution-1
Financial statement preparation is one of the critical activities performed by accountant. It normally
includes the actual expenses incurred along with the estimates. This estimate may belong to provision for
doubtful debts, depreciation, etc. For estimating the depreciation amount, following information are
required:
a) Cost of asset
b) Useful life of asset
c) Residual value of asset after useful life
d) Method of depreciation calculation
The above elements of depreciation estimation have been explained below:
a) Cost of asset – Cost of asset not only includes the cost paid to the supplier but other costs like
freight charges, installation charges, etc (Bragg and Bragg, 2017). This is the starting point in
estimating the cost of depreciation. All costs which are incurred to bring the assets in such a
position that asset can be put to use, are considered part of the cost of asset. For example, a
machinery was purchased. In such a case, cost of asset would include purchase cost, freight
charges (if any) paid to bring machinery to the factory, its installation charges, other expenses
incurred before the asset is put to use.
b) Useful life of asset – The period for which asset will be used by the organisation without any
major upgradation or maintenance is called useful life of the asset. It is a period up to which
organisation expect that asset will generate economic benefits. Depreciation on the asset is
charged during this period.
c) Residual Value of asset after useful life – This is the amount which is expected to recover from
sale of the asset after the useful life of asset has completed. This amount itself is an estimate. This
amount is received at the end of the useful life of asset. In some cases, depreciation is calculated
on the net amount remained after residual value of asset is deducted from the cost of asset.
d) Method of depreciation calculation – There are many ways for calculation of depreciation on
any asset. Some of the methods of depreciation calculation are (Investopedia, 2017):
 Straight-line Depreciation
 Written Down or Diminishing Balance Method
 Unit-of-Production Depreciation
 Hours-of-Service Depreciation
 Accelerated Depreciation
 Sum-of-Year Method
 Double-Declining-Balance Method
Organisation needs to select one of the method to calculate depreciation. We have explained the
most popular two method of depreciation below:

i. Straight line method – This is most simple method for calculation of depreciation. In this
method, residual value of asset is subtracted from cost of asset. Remaining amount is
then divided by the useful life of the asset (in years or months) to arrive at depreciation
amount (annual depreciation amount in case useful life is in years or monthly
depreciation amount in case useful life is in months). In this method, depreciation amount
remains constant over the life of asset.
ii. Written down or diminishing balance method – In this method, depreciation in each year
keeps on reducing. In the first year, depreciation is calculated on the cost of asset at some
percentage rate driven from the useful life. In the second year, depreciation is calculated
on the cost of assets minus first year depreciation at the same percentage rate. In the third
year, depreciation is calculated on the cost of assets minus first year and second year
depreciation at the same percentage rate and so on till the useful life of asset is
completed.
References:
Investopedia. (2017). Types Of Depreciation. [online] Available at:
http://www.investopedia.com/walkthrough/corporate-finance/2/depreciation/types-depreciation.aspx [Accessed 6
Oct. 2017].
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 6 Oct. 2017].
Solution-2
Journal Entries in the books of Midnight Boil Ltd.
Date Particulars Dr./ Cr. Debit Credit
30-Jun-18 Capital Work in Progress A/c Dr. 12,550,000
To Cash A/c 12,550,000
(Expenses incurred for construction)
30-Jun-18 Capital Work in Progress A/c Dr. 4,001,500
To Cash A/c 4,001,500
(Expenses incurred for construction)
01-Jul-18 Nuclear Power Generator A/c Dr. 16,551,500
To Capital Work in Progress A/c

16,551,500
(Contraction completed and asset
recognised in books)
01-Jul-18
Nuclear Power Generator A/c
(2,100,000/(1 + 10%)^10) Dr. 809,641
To Provision for Asset Retirement
Obligation A/c 809,641
(Provision for dismantling cost
accounted for)
30-Jun-19 Interest expense A/c Dr. 80,964
To Provision for Asset Retirement
Obligation A/c 80,964
(Interest expenses incurred on
dismantling cost)
30-Jun-24
Interest expense A/c (as per calculation
below) Dr. 130,393
To Provision for Asset Retirement
Obligation A/c 130,393
(Interest expenses incurred on
dismantling cost)
Calculation of Interest expenses
Date Interest expenses
Provision
for Asset
Retiremen
t
Obligatio
n
30-Jun-18 - 809,641
30-Jun-19 80,964 890,605
30-Jun-20 89,060 979,665
30-Jun-21 97,967 1,077,632
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 Year 2015 Year 2016 Year 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 10,000,000
To Expenses A/c 10,000,000
(Expenses incurred for contruction)
Construction in progress A/c 3,157,895

Construction expenses A/c 10,000,000
To Income from Contract A/c 13,157,895
(Income and profit from the construction contract
recorded)
Accounts receivable A/c 12,000,000
To Construction in progress A/c 12,000,000
(Invoiced client against construction contract)
Cash A/c 11,000,000
To Accounts receivable A/c 11,000,000
(Amount received from client)
(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 10,000,000
To Expenses 10,000,000
(Expenses incurred for contruction)
Construction expenses 10,000,000
To Income from Contract 10,000,000
(Income from the construction contract recorded)
Accounts receivable A/c 12,000,000
To Construction in progress A/c 12,000,000
(Invoiced client against construction contract)
Cash A/c 11,000,000
To Accounts receivable A/c 11,000,000
(Amount received from client)

Construction in progress A/c 2,000,000
To Contract Liability A/c 2,000,000
(Amount invoiced over cost of construction
recognised as liability)
Solution 4
(a)
As on 1st Jul-18
Consideration Paid 7,000,000
Less: Carrying value of the net identifiable assets 5,800,000
Goodwill recorded on 1st Jul-18 1,200,000
As on 30th Jun-19
Recoverable amount of CGU 6,200,000
Less: Carrying value of the net identifiable assets 5,800,000
Goodwill balance as on 30th Jun-19 400,000
Impairment loss = 1,200,000 - 400,000
= 800,000
Journal Entry
Date Particulars Debit Credit
30-Jun-19 Impairment Loss 800,000
To Accumulated Impairment Loss - Goodwill 800,000
(Impairment loss recorded)

(b)
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
)
This loss of $2,200,000 will first be applied to write off goodwill.
Impairment loss 2,200,000
Less: Goodwill written off 1,200,000
Balance to be written off 1,000,000
This balance will be shared among other assets in their ratio.
Particulars Carrying Amt Ratio
Impairment
Loss Net Carrying value
Customer
List 50,000 0.83% 8,333 41,667
Machinery 1,450,000 24.17% 241,667 1,208,333
Buildings 1,500,000 25.00% 250,000 1,250,000
Land 3,000,000 50.00% 500,000 2,500,000
6,000,000 100.00% 1,000,000 5,000,000
Journal Entry
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)