Question

Inland Ports Ltd (IPL) operates several land-based container facilities around New Zealand. IPL has determined that its facility in Taupo is a Cash-Generating Unit (CGU). IPL refers to this Taupo facility as ‘CGU-Taupō.

Since the completion of the Taupo bypass, there has been a slow-down in demand for inland port services in the Taupo area. In response, IPL has revised its forecasts downwards for the foreseeable future. Based on these forecasts, IPL has determined the Value in Use of CGU-Taupō at the end of the 2018 financial year to be $400,000. The fair value of CGU-Taupo is $410,000 before allowing for $12,000 of costs of disposal.

The carrying amount of the assets that comprise CGU-Taupō are as follows:

CGU-Taupō $

Carrying amount of assets at end of the 2018 financial year:

Buildings (at cost)                                                                                           350,000

Accumulated depreciation – building                                                             (110,000)

Factory machinery (at cost)                                                                            230,000

Accumulated depreciation – machine                                                            (50,000)

Goodwill (net of previous impairment of $20,000)                                        80,000

500,000

REQUIRED: Determine the appropriate accounting treatment for the CGU-Taupō as at the end of the 2018

financial year. Show all your workings, and provide all necessary journal entries, with

appropriate narration(s). Ignore any tax implications.

Answer 1

TOTAL CARRY AMOUNT OF CGU-TEUPO = 350000-110000+230000-50000+80000 = 500000

HOWEVER THE VALUE IN USE = $ 400000,

AND FAIR VALUE LESS COST TO DISPOSE = 410000-12000 = $398000

THEREFORE VALUE OF CGU SHOULD BE LOWER OF :-

• FAIR VALUE
• VALUE IN USE

WHICH IS $398000

THEREFORE IMPAIRMENT LOSS = 500000-398000 = $102000

RATIO OF DISTRIBUTION OF IMPAIRMENT LOSS = CARRY AMOUNT OF BUILDING : CARRY AMOUNT OF MACHINE = 240000 : 18000 = 24:18

JOURNAL ENTRY REQUIRED TO BE PASSED IS

IMPAIRMENT LOSS A/C DR 102000

TO GOODWILL 80000

TO BUILDING A/C 12571

TO MACHINERY A/C 9429

(BEING IMPAIRMENT LOSS CHARGED ON CGU WHERE WHOLE GOODWILL IS WRITTEN OFF THE BALANCE IMPAIRMENT LOSS IS CHARGED ON BUILDING AND MACHINERY IN RATIO OS THERE CARRY AMOUNT)