Impairment Quiz Questions Essay

Custom Student Mr. Teacher ENG 1001-04 15 September 2016

Impairment Quiz Questions

1.When should an entity conduct an impairment test? (2 Marks)

Assets that are consider to have uncertain carrying amounts must be tested every year for impairment.

Goodwill acquired in a business combination
Intangible assets with an indefinite useful life
Intangibles not yet ready for use

Impairment testing of all other assets is required only if there is an indication that they might be impaired due to events such as the economic and legal environment and market values etc.

2.How is an impairment test undertaken? (2 Marks)

The test involves comparing the carrying amount of an assets or CGU with its recoverable amount. The recoverable amount is the higher of fair value less cost to sell and it value in use.

3.What is ‘value in use’? (1 Mark)

Value in use is the present value of future cash flows expected to be derived from an asset or a CGU.

4.How is value in use for a cash generating unit calculated? (2 Marks)

It is a professional estimate based on past cash inflows and expected future cash inflows.

5.What is an impairment loss? (1 Mark)

The loss of future economic benefit as the amount in the balance sheet for the asset or CGU exceeds it recoverable amount.

6.What is a cash-generating unit? (1 Mark)

A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows of other assets or groups of assets. CGU assets usually cannot be tested individually.

7.How are corporate assets tested for impairment? (2 Marks)

As they do not independently generate cash flows they are allocated to CGU on a reasonable or consistent basis. The portion of corporate assets is then tested along with the assets of the CGU to which it has been allotted.

8.Supersatumas grows citrus fruit on a number of orchards in the Perth Hills. This fruit is then processed into fruit juice and other products at their cannery. These products are then sold to the public via their chain of Jucymarket stores. How many cash generating units would the company have? Why? (2 Marks)

3 if there is an active market for the output of each stage. The stages being the fruit of the orchards, the processed products in their cannery and the juice sold in their stores. This is true even if all or part of the output produced is used internally.

9.In allocating an impairment loss for a cash generating unit which of the following assets would not be given a portion of the loss – land; machinery; inventory; manufacturing licence; receivables? Why? (1 Mark)

Inventory and accounts receivable. AASB 136 para 2 states that this standard does not apply to them as they are already covered (impaired) by other standards such as allowance for doubtful debts.

10.In allocating an impairment loss for a CGU the carrying amount of any individual asset must not be reduced below what figure? (1 Mark)

The highest of it fair-value less cost to sell and its value in use or below zero.

11.If a portion of an impairment loss for a CGU cannot be allocated to one of the unit’s assets because it will breach AASB 136 paragraph 105 what happens to that portion? (1 Mark)

It is allocated pro-rata to the other assets of that unit (group of units) that can be impaired further.

12.Timbertown Ltd processes pine trees grown on its own plantations in its timber mills. The milled timber is then made into outdoor furniture for sale to the public. Is it possible for Timbertown Ltd to have more than CGU? (2 Marks)

Yes. If there is an active market for the output of each stage. This is true even if all or part of the output produced is used internally.

13.Gumtree Ltd has determined that its picnic ware division is a CGU. The carrying amounts of the net assets of the division at 30 June 2013 are:

Factory (net)$310 000
Land200 000
Equipment (net)120 000
Inventory75 000
Receivables32 000
Accounts Payable(17 000)
Do not impair liabilities

Gumtree Ltd has calculated the value in use of the division to be $680 000.

Required
Determine if an impairment loss exists for the picnic ware division. Show all workings. (1 Mark)

310000 + 2000000 + 120000 + 75000 + 32000 = 737000 Carrying amount assets 680 000 Value in use

Impairment loss = 57000

14.Silkyoak Ltd has determined that its nursery division is a CGU. The carrying amounts of the net assets of the division at 30 June 2013 are:
Land80 000
Propagating Sheds48 000
Sales Office 25 000
Equipment (net)56 000
Inventory35 000
Receivables19 000
Accounts Payable(26 000)
Mortgage Loan(50 000)
Silky Oak Ltd has calculated the value in use of the division to be $327 000.
Required
Determine if an impairment loss exists for the nursery division. Show all workings. (1 Mark)

80, 000 + 48000 + 25000 + 56000 + 35000 + 19000 = 236000 Carrying amount 327000 Value in use

NO Impairment loss

15.Hovea Ltd has determined that its transport division has suffered an impairment loss of $52 000 for the year ended 30 June 2013. At that date the carrying amount of the division’s assets were

$
Receivables 31 000
Inventory 18 000
Land150 000
Trucks (net)250 000
Servicing Unit 50 000

Cannot allocate to receivables and inventory

Required
Allocate the loss across the assets of the CGU in accordance with AASB 136, paragraph 104. Show all workings. (3 Marks) You can drop to 150 ÷ 450

CA Allocation New CA Land 150000 (150000 ÷ 450000) 17333 132667 Truck 250000 (250000 ÷ 450000) 28889 221111 Service Unit 50000 (50000 ÷ 450000) 5778 44222 450000

Round to nearest dollar from 0.50

16.Tuart Ltd has determined that its retail division has suffered an impairment loss of $37 000 for the year ended 30 June 2013. At that date the carrying amount of the division’s assets were
$
Inventory 92 000
Shop Fittings (net) 40 000
Land100 000
Buildings180 000

Additionally, the company has corporate assets worth $150 000, one third of which have been allocated to the retail division.

Required
Allocate the loss across the assets of the CGU in accordance with AASB 136, paragraph 104. Show all workings (3 Marks)

CA Allocation New CA Shop fittings 40000 (40000 ÷ 370000) 4000 36000 Land
100000 (100000 ÷ 370000) 10000 90000 Building 180000 (180000 ÷ 370000) 18000 162000 Corporate O/H 50000 (50000 ÷ 370000) 370000

17.Peppermint Ltd has determined that its orchard division has suffered an impairment loss of $42 000 for the year ended 30 June 2013. At that date the carrying amount of the division’s assets were

$
Inventory 21 000
Land200 000
Fruit Trees114 000
Reticulation Systems 36 000
Goodwill 60 000

Required
Allocate the loss across the assets of the CGU in accordance with AASB 136, paragraph 104 and prepare the journal entry to record the loss. Show all workings. (2 Marks)

Goodwill 60000 – 42000 = 18000 remaining goodwill

2013
30 June Impairment loss 42000 Accumulated impairment losses – goodwill 42000

18.Can an impairment loss, once recorded, be reversed? (2 Marks)
Yes an impairment loss recognised in previous period that no longer exists can be reversed in the current year. However an impairment of goodwill cannot be reversed.

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