N1612 Intermediate Financial Accounting Week 8 Workshop Answers:
Q1 Fido Feed Ltd has the following loans in place throughout the year ended 31 Dec 2018 which constitute its general borrowing for the period.
10% Bank loan £140m
8% bank loan £200m
On 1 July 2018 50 million was used for construction of a qualifying asset which was completed during 2019.
What amount should be capitalised as borrowing costs at 31 Dec 2018 in respect of this asset.
a. £ 1.83 million
b. £ 2.25 million
c. £ 2.2 million
d. £4.4 million
e. £ 4.5 million
Q2 By 27 September 20X7 internal evidence had emerged suggesting that Dearing Co's machine was impaired. Select whether the following are internal or external indicators of impairment.
A. The performance of the machine had declined leading to reduced economic benefits: Internal indicator / External indicator
B. There were legal and regulatory changes affecting the operating of the machine: Internal indicator / External indicator
C. There was an unexpected fall in the market value of the machine: Internal indicator / External indicator
D. New technological innovations were producing more efficient machines: Internal indicator / External indicator
Q3 On 30 September 20X7 the impairment review was carried out. The following amounts were established in respect of the machine:
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＄
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Carrying amount
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850,000
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Value in use
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760,000
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Fair value
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850,000
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Costs of disposal
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30,000
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What should be the carrying amount of the machine following the impairment review?
a. $ 850,000
b. $ 760,000
c. $ 730,000
d. $ 790,000
e. $ 820,000
Q4 Which of the following could be an indication that an asset may be impaired according to IAS 36 Impairment of Assets?
(i) Increase in market interest rates
(ii) Obsolescence of assets
(iii) Reduction in market value of an asset
(iv) Management intention to reorganise the business
a. All of them
b. II, III and IV
c. II and III
d. I and IV
e. II and IV
Q5 Determine the recoverable amount of each of the following four assets and state the amount of any impairment loss which should be recognized in each case
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Carrying Amount
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Fair Value less cost of disposal
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Value in use
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Impairment loss
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Asset 1
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25,000
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22,500
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27,500
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?
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Asset 2
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6,500
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3,750
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4,800
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?
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Asset 3
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18,250
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17,500
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15,000
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?
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Asset 4
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11,400
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13,400
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12,750
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?
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Q6 The following information relates to four assets held by the company:
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Asset A
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Asset B
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Asset C
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Asset D
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£m
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£m
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£m
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£m
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Carrying amount
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120
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30
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40
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70
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Value in use
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80
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70
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80
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20
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Fair value less cost to sell
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90
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40
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70
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30
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What is the total impairment loss?
a. 70
b. 30
c. 20
d. 10
e. 60
Q7 Give two examples on judgement exercised by accountants when accounting for goodwill and goodwill impairment.
Note: after the workshop, practice writing few sentences explaining the two examples to a hypothetical friend who is not studying accounting. As an accountant, you will be dealing with different stakeholders who do not have solid accounting background.
Q8 Riley Co acquired a non-current asset on 1 October 20W9 (ten years before 20X9) at a cost of $100,000 which had a useful life of ten years and a nil residual value. The asset had been correctly depreciated up to 30 September 20X4. At that date the asset was damaged and an impairment review was performed. On 30 September 20X4, the fair value of the asset less costs of disposal was $30,000 and the expected future cash flows were $8,500 per annum for the next five years. The current cost of capital is 10% and a five-year annuity of $1 per annum at 10% would have a present value of $3.79.
What amount would be charged to profit or loss for the impairment of this asset for the year ended 30 September 20X4?
a. $17,785
b. $20,000
c. $30,000
d. $32,215
e. $63,700
Q9 A company owns a car that was involved in an accident at the year end. It is barely useable, so the value in use is estimated at $1,000. However, the car is a classic and there is a demand for the parts. This results in a fair value less costs to sell of $3,000. The opening carrying amount was $8,000 and the car was estimated to have a life of eight years from the start of the year.
i) Identify the recoverable amount of the car
a. $7,000
b. $2,000
c. $4,000
d. $8,000
e. $3,000
ii) identify any impairment required at the year end.
a. $7,000
b. $2,000
c. $4,000
d. $8,000
e. $3,000
Q10 A company runs a unit that suffers a massive drop in income due to the failure of its technology on 1 January 20X8. The following carrying amounts were recorded in the books immediately prior to the impairment:
$m
Goodwill 20
Technology 5
Brands 10
Land 50
Buildings 30
Other net assets 40
The recoverable value of the unit is estimated at $85 million. The technology is worthless, following its complete failure. The other net assets include inventory, receivables and payables. It is considered that the carrying amount of other net assets is a reasonable representation of its recoverable amount.
Show the impact of the impairment on 1 January.
Q11 Finsbury Ltd has a cash generating unit (CGU) that suffers a large drop in income due to reduced demand for its products. An impairment review was carried out and the recoverable amount of the cash generating unit was determined at $100m.The assets of the CGU had the following carrying amounts immediately prior to the impairment:
$m
Goodwill 25
Intangibles 60
Property, plant and equipment 30
Inventory 15
Trade receivables 10
–––––
140
The inventory and receivables are considered to be included at their recoverable amounts.
What is the carrying amount of the intangibles once the impairment loss has been allocated?
A $45m
B $50m
C $55m
D $60m
Q12 A cash-generating unit comprises the following assets:
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$000
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Building
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700
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Plant and equipment
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200
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Goodwill
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90
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Current assets
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20
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1,010
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One of the machines, carried at $40,000, is damaged and will have to be scrapped. The recoverable amount of the cash-generating unit is estimated at $750,000.
What will be the carrying amount of the building after the impairment loss has been recognised? (to the nearest $000)
A. $597,000
B. $577,000
C. $594,000
D. $548,000
Self-study exercise
Q13 An entity owns a property which was originally purchased for $300,000. The property has been revalued to $500,000 with the revaluation of $200,000 being recognised as other comprehensive income and recorded in the revaluation reserve. The property has a current carrying value of $460,000 but the recoverable amount of the property has just been estimated at only $200,000.
What is the amount of impairment and how should this be treated in the financial statements?
Carrying value 460,000 > Recoverable Amount 200,000
therefore impairment = 260,000
Of this $200,000 is DR to revaluation reserve reversing previous upwards revaluation. Remaining $60,000 DR to the statement of profit or loss.
DR Revaluation Reserve 200,000
CR Property 200,000
DR Impairment Loss (260-200) 60,000
CR Accumulated Impairment Property 60,000
To record impairment loss including reversal of previous revaluation gain.