Case study 1 [p 492]

Magenta Ltd has two divisions, Turquoise and Pink, each of which is a separate cash-
generating unit. Magenta Ltd adopts a decentralised management approach whereby unit
managers are expected to operate their units. However, there is one corporate asset, the
information technology network to the company as a whole. The information technology
network is not a depreciable asset.
At 30 June 2010, the net assets of each division, including its allocated share of the
information technology network, were as follows
Turquoise Pink
Information technology network $ 284 000 $ 116 000
Land 450 000 290 000
Plant (20% p.a. straight-line depreciation) 1 310 000 960 000
Accumulated depreciation (917 000) (384 000)
Goodwill 46 000 32 000
Patent (10% straight-line amortisation) 210 000 255 000
Accumulated amortisation – patent (21 000) (102 000)
Cash 20 000 12 000
Inventory 120 000 80 000
Receivables 34 000 40 000
Liabilities (276 000) (189 000)
Net assets 1 260 000 1 110 000

Additional information as at 30 June 2010:

 Turquoise land had a fair value less costs to sell of $437 000
 Pink patent had acarrying amount below fair value less costs to sell
 Pink plant had a fair value less costs to sell of $540 000
 Receivables were considered to be collectable
 The IT network is not depreciated, as it is assumed to have an indefinite life.
 Magenta Ltd’s management undertook impairment testing at 30 June 2010 and
determined the recoverable amount of each cash-generating unit to be: $1 430 000 for
Turquoise and $1 215 000 for Pink
Required
Prepare any journal entries necessary to record the results of the impairment testing for each
of the CGUs.