Impairment Loss Allocation to Assets

This assignment focuses on calculating the impairment loss allocation for a company's assets, specifically machinery and a patent. It provides a scenario where the fair value of the patent is lower than its carrying amount, triggering an impairment assessment. The student must determine the appropriate allocation of the impairment loss between the assets based on their carrying amounts and assigned ratios. The assignment also explores different scenarios with varying fair values to demonstrate the impact on allocation.

Solution -1
MEMORANDUM
Date: 9th September, 2017
To: Jennifer
From: Chief Accountant
Subject: Key problems with the statement of financial position prepared by Jennifer
During verification of financial statement sent by you, we have come across certain issues, which are listed below:
a. Current /non-current classification – The presented statement of financial position does not provide the
classification of items as per their liquidity, i.e. current and non-current in accordance with AASB 101. As per
AASB 101, any assets or liability expected to be realized or settled within the company’s normal operating
cycle or 12 months from the reporting date should be classified as current and all other as non-current. The
relevant text of para 51 of AASB 101 states that:
“An entity shall present current and non-current assets, and current and non-current liabilities, as separate
classifications on the face of its balance sheet.”
b. Minimum Items to be displayed– As per AASB 101, the assets and liabilities should be properly presented
and grouped. As per AASB 101, the statement of financial position should contain the following line items.
The balance sheet prepared by you fails to meet these criteria.
“As per AASB 101,
a. property, plant and equipment;
b. investment property;
c. intangible assets;
d. financial assets (excluding amounts shown under (e), (h) and (i));
e. investments accounted for using the equity method;
f. biological assets;
g. inventories;
h. trade and other receivables;
i. cash and cash equivalents;
j. the total of assets classified as held for sale and assets included in disposal groups classified as
held for sale in accordance with AASB 5 Non-current Assets Held for Sale and Discontinued
Operations;
k. trade and other payables;
l. provisions;
m. financial liabilities (excluding amounts shown under (k) and (l));
n. liabilities and assets for current tax, as defined in AASB 112 Income Taxes;

o. deferred tax liabilities and deferred tax assets, as defined in AASB 112;
p. liabilities included in disposal groups classified as held for sale in accordance with AASB 5;
q. minority interest, presented within equity; and
r. issued share capital and reserves attributable to owners of the parent (AASB 101, par. 54).”
c. Format of financial statement – Further, the format used for preparation of statement of financial position
should correspond with the format prescribed by AASB 101. The statement prepared by you is not in
accordance with the prescribed format. As per AASB 101, para 55,
“AASB 101.55 requires entities to present additional line items, headings and subtotals in the statement of
financial position when such presentation is relevant to an understanding of an entity’s financial position.”
d. Sub classification in notes – Further, sub classification of line items is required to be provided in notes to
accounts of the financial statements. For example, the classification of share capital to be disclosed in
number of shares and amount, further into preference share capital and ordinary share capital, etc.
Enclosures:
1. Revised Statement of Financial Position

WESLEY LTD.
STATEMENT OF FINANCIAL POSITION
For the year ended on 30 June, 2017
Particulars Amount as on
30 June, 2017
Current assets
Cash and cash equivalents 4,000
Trade and other receivables 160,000
Inventories 36,000
Other assets 10,000
Total current assets 210,000
Non-current assets
Property, plant and equipment 610,000
Investment Property 114,000
Intangible assets 94,000
Other assets 36,000
Total non-current assets 854,000
Total assets 1,064,000
Current liabilities
Trade and other payables 110,000
Short term borrowings 62,000
Current tax liabilities 8,000
Provisions 40,000
Financial liabilities 100,000
Total current liabilities 320,000
Non-current liabilities
Financial liabilities 500,000
Total non-current liabilities 500,000
Total liabilities 820,000
Equity
Ordinary share capital 200,000
Reserves 24,000
Retained earnings 20,000
Total equity 244,000

Total liabilities and equity 1,064,000

Solution-2
Journal Entries in the books of Ansett Ltd
Date Description
Dr./
Cr. Debit Credit
31-Jul-16 Bank Account Dr. 8,250,000
To Share Application Money Account 8,250,000
(Share application money received on 5,500,000 shares)
12-Aug-16 Share Application Money Account Dr. 8,250,000
To Share Capital Account 7,500,000
To Bank Account 750,000
(5,000,000 shares allotted and application money on 500,000 shares
returned)
12-Aug-16 Share Allotment Account Dr. 1,500,000
To Share Capital Account 1,500,000
(Amount due on share allotment)
12-Sep-16 Bank Account Dr. 1,500,000
To Share Allotment Account 1,500,000
(Allotment money received)
20-Mar-17 Share First Call Account Dr. 1,000,000
To Share Capital Account 1,000,000
(Amount due on share first call)
30-Apr-17 Bank Account Dr. 990,000
To Share First Call Account 990,000
(First call received on 4,950,000)
31-May-17 Share Capital Account Dr. 100,000
To Share First Call Account 10,000
To Forfeited Shares Account 90,000
(50,000 shares forfeited for non-payment of share first call amount)

05-Jun-17 Bank Account Dr. 85,000
Forfeited Shares Account Dr. 15,000
To Share Capital Account 100,000
(Reissue of 50,000 shares at $1.70)
05-Jun-17 Forfeited Shares Account Dr. 5,000
To Bank Account 5,000
(Cost of reissue)
05-Jun-17 Forfeited Shares Account Dr. 70,000
To Bank Account 70,000
(Surplus remained in the forfeited account after reissue was returned to
the shareholders whose shares were forfeited)

Solution-3
Journal Entries in the books of Genesis Ltd
Date Description
Dr. /
Cr. Debit Credit
01-Jul-15 Machine Account - G Dr. 400,000
Machine Account - Q 300,000
To Bank Account 700,000
(Machine G and Q purchased)
30-Jun-16 Depreciation Expenses Account Dr. 96,000
To Accumulated Depreciation Account - Machine G 36,000
To Accumulated Depreciation Account - Machine Q 60,000
(To record depreciation on machines)
30-Jun-16 Loss on Revaluation Account Dr. 24,000
Accumulated Depreciation Account - Machine G Dr. 36,000
Accumulated Depreciation Account - Machine Q Dr. 60,000
Machine Account - G 20,000
Machine Account - Q 100,000
(Both machinery revalued and recorded at fair value)
30-Jun-16 Deferred Tax Asset Account Dr. 7,200
To Loss on Revaluation Account 7,200
(Deferred tax assets recorded on revaluation)
30-Jun-17 Depreciation Expenses Account Dr. 82,500
To Accumulated Depreciation Account - Machine G 42,500
To Accumulated Depreciation Account - Machine Q 40,000
(To record depreciation on machines)
30-Jun-17 Revaluation Loss Dr. 37,500
Accumulated Depreciation Account - Machine G Dr. 42,500
Machine Account - G 80,000
(Machinery G revalued and recorded at fair value)
30-Jun-17 Deferred Tax Asset Account Dr. 11,250
To Loss on Revaluation Account 11,250
(Deferred tax assets recorded on revaluation) `
Working Notes
1 Calculation of yearly depreciation (1st July 2015)
Machine G
Cost of Machine =

400,000
Less: Residual value = 40,000
360,000
Life in years = 10
Annual depreciation = 36,000
Machine Q
Cost of Machine = 300,000
Less: Residual value = -
300,000
Life in years = 5
Annual depreciation = 60,000
2 Calculation of yearly depreciation (30th June 2016)
Machine G
Carrying value = 364,000
Revalued amount = 380,000
Revaluation surplus 16,000
Revalued amount = 380,000
Less: Residual value = 40,000
340,000
Life in years = 8
Annual depreciation = 42,500
Machine Q
Carrying value =

240,000
Revalued amount = 200,000
Revaluation loss 40,000
Revalued amount = 200,000
Less: Residual value = -
200,000
Life in years = 5
Annual depreciation = 40,000
3 Calculation of yearly depreciation (30th June 2017)
Machine G
Carrying value = 337,500
Revalued amount = 300,000
Revaluation loss 37,500
Machine Q
Carrying value = 160,000
Revalued amount = 160,000
-
Solution-4
Journal Entries in the books of Big Friday Ltd
Dat
e Description Debit Credit
Part (i)
30-
Jun-
17 Impairment Loss Account 145,200
Accumulated Depreciation - Machinery 240,000

To Patent 15,000
To Machinery 355,200
To Goodwill 15,000
(Impairment loss recorded)
Part (ii)
30-
Jun-
17 Impairment Loss Account 145,200
Accumulated Depreciation - Machinery 240,000
To Patent 30,000
To Machinery 340,200
To Goodwill 15,000
(Impairment loss recorded)
Working Notes
Calculation of total impairment loss
Machinery = 840,000
Accumulated depreciation - machinery = (240,000)
Patent = 150,000
Receivables = 16,000
Inventory = 87,000
Cash = 20,000
Goodwill = 15,000
Carrying amounts 888,000
Fair Value less costs to sell = 742,800
Value in use = 650,000
Higher of fair value less costs to sell and value in use 742,800
Impairment Loss (888,000-742,800) = 145,200
Allocation of impairment loss
Impairment loss will first be used to write off goodwill. Therefore,
Impairment Loss = 145,200
Less: Goodwill = 15,000
Remaining impairment loss to be allocated 130,200
Now, it is given that accounts receivable and inventory are appearing at the recoverable value. Therefore,
remaining impairment loss to be allocated to remaining assets except cash.
Accounts
Carrying
Amount Ratio
Loss
Allocated
Machinery 600,000 80.00% 104,160
Patent 150,000 20.00% 26,040
750,000 100.00% 130,200