Goodwill Impairment Calculation

This assignment focuses on calculating goodwill impairment for a company named Bo Ltd. It demonstrates the formula for determining goodwill using the acquisition price and fair value of identifiable assets. The calculation also involves determining the recoverable amount of a Cash Generating Unit (CGU) and identifying any potential impairment losses. The example illustrates how to allocate the impairment loss across various assets within the CGU, including customer lists, machinery, buildings, and land.

Solution-1
Preparing financial statements is a very important and breath taking exercise for any organization. Its
accuracy is of utmost importance and each and every element is to be decided and calculated very
carefully, otherwise the output can be drastic. For determining the depreciation for the first year, we need
the following information (Accounting, Financial, Tax, 2017):
1. Cost of assets
2. Useful life of assets
3. Residual Value
4. Depreciation Method
5. Method of Valuation
Let’s discuss these factors in detail:
1. Cost of assets – The cost paid for the asset is the important part for calculation of depreciation.
This cost includes the purchase price of the assets or any other costs incurred in bringing the
assets to its present location and condition and required for use of the assets. These include
freight paid, installation charges, taxes paid, etc.
2. Useful life of assets – Useful life means the period up to which the assets can generate future
economic benefits or can be used. This life is required to estimate the benefits available and for
depreciating the assets so that revenue and expense concept can be matched.
3. Residual Value – The amount that would be received at the end of useful life of the asset is
known as residual value. This amount is received when the asset is scrapped or sold at the end of
its life. Residual Value is deducted from the cost of the assets to determine the depreciation exp.
4. Depreciation Method – There are different types of depreciation methods prescribed by the
accounting standards. The company needs to adopt one method from these. The method chosen
should be related to the economic future benefits provided by the asset. The methods available are
as below:
a. Straight Line Method – Under this method, to determine the depreciation expense for a
year, the cost of the asset less residual value is divided by the useful life of the asset. The
depreciation under this method remains uniform over the life. This method is useful for
assets whose benefits are expected to be received uniformly over the life (Accounting-
simplified.com, 2017).
b. Diminishing Balance Method – Under this method, the depreciation charge is higher in
the initial years and keeps on reducing with the life of the assets. Because, the
depreciation is calculated on the written down value (means cost less accumulated
depreciation of earlier years). This is the most popular method as normally the assets
provide higher benefits in the initial years and their benefits keeps on reducing with the
passage of time (Accounting-simplified.com, 2017).

c. Units of Production Method – This method is best for the machines / assets involved in
the production / manufacturing. Under this method the cost less residual value is divided
by the number of units expected to be produced over the life of the assets and multiplied
by the number of units actually produced during the period (Accounting-simplified.com,
2017).
5. Method of Valuation – After calculation of depreciation, AASB 116, “Property, Plant and
Equipment”, requires the above factors to be reviewed periodically. Further, the assets should be
valued by using one of the two methods prescribed by the standard. These methods are cost
model and revaluation model. The management needs to decide as to which method to adopt.
References:
1. Accounting-simplified.com. (2017). Units of Production Depreciation Method - Explanation and
Examples. [online] Available at: http://accounting-simplified.com/financial/fixed-assets/depreciation-
methods/units-of-production.html [Accessed 21 Sep. 2017].
2. 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].
3. Accounting-simplified.com. (2017). Methods of Depreciation | Accounting-Simplified.com. [online]
Available at: http://accounting-simplified.com/financial/fixed-assets/depreciation-methods/types.html
[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 ($m) 2016 ($m) 2017 ($m)
Contract Price 50 50 50
Less:
Cost for the year 10 28 40
Estimated costs to complete 28 12 0
Estimated total cost 38 40 40
Estimated Profit 12 10 10
% 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 Recognised 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 recognised)
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) Journal Entries in the books of Mam Ltd.
Date Particulars Debit Credit
30 June, 2019 Impairment Loss (refer WN-1) 400,000
To Accumulated Impairment Loss - Goodwill 400,000
(To record impairment of goodwill)
(b) 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 241,667
To Buildings 250,000
To Land 500,000
(To record impairment of assets)
WN-1 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
WN-2 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)
This impairment loss is first adjusted with goodwill of $1,200,000. Remaining
$1,000,000 is to be divided in the ratio of carrying amount of assets.
Particulars Carrying Amt 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