Topic 5 Accounting for Intangibles and Impairment

Question 1

Rangers Ltd acquired the following assets and liabilities of Rovers Ltd.

Book Value Fair Value

Plant and Equipment 150,000 170,000
Internally generated brandname ------ 30,000
Bank Loan 50,000
Accounts Payable 30,000
Rangers Ltd provided the following consideration.
Book Value Fair Value
Cash 200,000
Shares in Rangers Ltd N.A. 60,000

Required

a Calculate the fair value of net assets acquired by Rangers Ltd

b Calculate the goodwill on acquisition
c Prepare journal entries to record the acquisition

Question 2

Burger Queen is a chain of fast-food restaurants. The main claim to fame of the Burger Queen
restaurants is the crunchiness of their fried chips.

To ensure a consistent standard of food and services across the country, the management of the
chain conducts spot checks on restaurants. Failure to provide the high standard expected by
Burger Queen management may result in the franchise for a particular location being taken away
from the franchisee. Burger Queen management is responsible for television advertising across
the county as well as the marketing program, including special deals that may be available at any
particular time.

Each restaurant is responsible for its own sales, cooking of food, training of staff, and general
matters such as cleanliness of the store. However, all material used in making the burgers and
other items sold are provided at a given cost from the central management, which can thereby
control the quality and the price.

Required

Identify the cash-generating unit(s) in this scenario (i.e. is each store a separate CGU or is the
entire chain a CGU?).

Give reasons for your conclusion

Question 3

The following information relates to Lusi Limited on 31 December 2018

Asset Carrying Amount Notes

Inventory 400,000 Recorded at lower of cost and net realisable value
Land 1,000,000
Vehicles 300,000 Depreciated at 10% per annum
Patent 200,000 Indefinite useful life
Goodwill 100,000
Total 2,000,000
These assets have a combined value in use of $1,800,000

Required

a Perform an impairment test to determine the impairment loss at 31 December 2018

Note treat the entire business as a CGU
b Determine how much of the impairment loss should be written off against goodwill
c Allocate the remaining impairment loss to other assets on a pro-rata basis
d How would your answer to (c) change if land had a recoverable amount of 940,000?
e Prepare journal entries to journalise the impairment loss

Question 4

Refer to Question 3

At 31 December 2019, value in use exceeds the carrying amount by $80,000

a Determine how much of the previous impairment loss can be reversed.

b Determine the carrying amount of the patent and vehicles:
 Following the impairment
 If no impairment loss had been recorded
c Allocate the reversal to the relevant assets.

Acknowledgement: Some questions have been taken or adapted from

 Deegan (2012) Australian Financial Accounting 7th Edition

 Leo et al., (2012) Company Accounting 9th Edition