Impairment of Goodwill and Assets

This assignment focuses on calculating the impairment loss of goodwill and net identifiable assets within a company's Cash Generating Unit (CGU). It presents a scenario involving Bo Ltd, outlining the calculation process, journal entries for recording the impairment, and allocation of the impairment loss across various assets based on their carrying values. The assignment emphasizes understanding the principles of goodwill impairment and its impact on the financial statements.

Solution-1
Depreciation refers to the reduction in the value of assets due to passage of time and normal wear and
tear. The depreciation should be recorded timely, else the financial statements will not reflect the true and
fair view. For determining the depreciation for the first year, the following information’s are required:
1. Asset cost– The cost at which assets is acquired. It includes purchase price, freight paid, taxes
or any other cost incurred to put the assets to use.
2. Estimated useful life of assets – Estimated useful life means the period upto which asset can
generate future economic benefits. Or in simple words, the period upto which the asset is
expected to be used.
3. Estimated Salvage Value – This is the amount that is expected to be realized by selling or
transferring the assets at the end of its useful life.
4. Method of Depreciation– After computing the above factors, the company needs to decide upon
the method that will be used to depreciate the assets. The following methods are available for
computation of depreciation:
a. Straight Line Method
b. Written Down Value Method
c. Units of Production Method
References:
1. Accounting, Financial, Tax. (2017). How To Calculate And Record Depreciation [of Fixed Asset].
[online] Available at: http://accounting-financial-tax.com/2009/04/how-to-calculate-and-record-
depreciation-of-fixed-asset/ [Accessed 23 Sep. 2017].

Solution-2
Journal Entries in the books of Midnight Boil Ltd.
Date Particulars Debit Credit
30 June, 2018 Capital Work in Progress 12,550,000
To Cash 12,550,000
(To record expenses incurred on construction of plant)
30 June, 2018 Capital Work in Progress 4,001,500
To Cash 4,001,500
(To record other expenses incurred on construction)
1 July, 2018 Nuclear Power Plant 16,551,500
To Capital Work in Progress 16,551,500
(To record asset)
1 July, 2018 Nuclear Power Plant (refer WN-1) 809,641
To Provision for Asset Retirement Obligation 809,641
(To record provision for dismantling costs)
30 June, 2019 Interest expense 80,964
To Provision for Asset Retirement Obligation 80,964
(To record interest expense on dismantling costs)
30 June, 2024 Interest expense (refer WN-2) 130,393
To Provision for Asset Retirement Obligation 130,393
(To record interest expense on dismantling costs)
WN-1 Calculation of Dismantling Costs:
Cost of Plant 16,551,500
Useful life (in years) 10
Dismantling Costs 2,100,000
Discount rate 10%
PV as on 1 July, 2018 809,641
WN-2 Interest expense schedule
Particulars Interest exp Provision for ARO
30 June, 2018 - 809,641
30 June, 2019 80,964.09 890,605

30 June, 2020 89,060.50 979,665
30 June, 2021 97,966.55 1,077,632
30 June, 2022 107,763.20 1,185,395
30 June, 2023 118,539.53 1,303,935
30 June, 2024 130,393.48 1,434,328
30 June, 2025 143,432.83 1,577,761
30 June, 2026 157,776.11 1,735,537
30 June, 2027 173,553.72 1,909,091
30 June, 2028 190,909.09 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 0
Estimated total cost 38,000,000 40,000,000 40,000,000
Estimated Profit 12,000,000 10,000,000 10,000,000
% completion 26.32% 70.00% 100.00%
Particulars 2015 2016 2017
Estimated Profit 12,000,000 10,000,000 10,000,000
% completed 26.32% 70.00% 100.00%
Profit Recognized for the year 3,158,400 3,841,600 3,000,000
(b) Journal entries for the 2015 financial year using the percentage-of-completion method
Particulars Dr/Cr Debit Credit
Construction in progress Dr. 10,000,000
To Expenses 10,000,000
(Contract cost recognized)
Construction in progress Dr. 3,158,400
Construction expenses Dr. 10,000,000
To Income from Contract 13,158,400
(Income and Profit from contract recognised)
Accounts receivable Dr. 12,000,000
To Construction in progress 12,000,000
(Amount receivable from customer)
Cash Dr. 11,000,000
To Accounts receivable 11,000,000
(Cash received from customer)

(c)
Journal entries for the 2015 financial year, assuming the stage of completion cannot be
reliably assessed
Particulars Dr/Cr Debit Credit
Construction in progress Dr. 10,000,000
To Expenses 10,000,000
(Contract cost recognised)
Construction expenses Dr. 10,000,000
To Income from Contract 10,000,000
(Income from contract recognised)
Accounts receivable Dr. 12,000,000
To Construction in progress 12,000,000
(Amount receivable from customer)
Cash Dr. 11,000,000
To Accounts receivable 11,000,000
(Cash received from customer)
Construction in progress Dr. 2,000,000
To Contract Liability 2,000,000
(Difference of amount billed over cost
recognised as liability)

Solution-4
(a)
Calculation of amount of Goodwill Impairment
As on 1 July, 2018
Goodwill =
Consideration Paid - Fair value of the net
identifiable assets of Bo Ltd
Goodwill = 7,000,000 - 5,800,000
Goodwill = 1,200,000
As on 30 June, 2019
Goodwill =
Recoverable amount of CGU - Fair value of the net
identifiable assets of Bo Ltd
= 6,200,000 - 5,800,000
= 400,000
Impairment of Goodwill = 1,200,000-400,000
= 800,000
Journal Entries in the books of Mam Ltd.
Date Particulars Debit Credit
30 June, 2019 Impairment Loss
800,00
0
To Accumulated Impairment Loss - Goodwill
800,00
0
(To record impairment of goodwill)
(b)
Calculation of Impairment Loss
Impairment Loss =
Recoverable amount of CGU - Fair
value of the net identifiable assets of
Bo Ltd
Impairment Loss = 4,800,000 - 7,000,000
Impairment Loss = (2,200,000)
First of all, the impairment loss should be adjusted with the goodwill available, i.e.
$1,200,000 and remaining loss of $1,000,000 is to be proportioned in the ratio of
carrying value of assets.
Particulars Carrying Value Ratio Impairment Loss

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
Total 6,000,000 100.00% 1,000,000
Journal Entries in the books of Mam Ltd.
Date Particulars Debit Credit
30 June, 2019 Impairment Loss (refer WN-2)
2,200,
000
To Accumulated Impairment Loss - Goodwill
1,200,
000
To Customer List 8,333
To Machinery
241,66
7
To Buildings
250,00
0
To Land
500,00
0
(To record impairment of assets)