ARFB233 Financial Accounting and Reporting 2

TUTORIAL: IMPAIRMENT

PART 1

Chapter 10 (FAR 2 Textbook):

o Application Exercise

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Review question

Burger queen is a chain of fast-food restaurants – most reasonably sized towns in the country
have a burger queen outlet. The key claim to fame of the burger queen restaurants is that their
fried chips are extra crunch. Also to ensure that there is a consistent standard of food and
service across the country, the management of the chain of restaurants conducts spot checks
on restaurants. Failure to provide the high standard expected by burger queen management
can mean that the franschise to a particular location can be taken away from the franchisee.
Burger Queen management is responsible for the television advertising across the country as
well as the marketing program, including the 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 the making of the
burgers and other items sold are provided at a given cost from the central management, which
can be thereby control the quality and the price.

Required:
Identify the cash-generating unit (CGU) in this scenario. Give reasons for your conclusions.

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PART 2

Question 1

On 1 January 2021, Narrabri Bhd acquired all the assets and liabilities of Oakey Bhd. Oakey Bhd
has a number of operating divisions, including one whose major industry is the manufacture of
toy trains, particularly those of historical significance. The toy trains division is regarded as a
cash generating unit. In paying RM2 million for the net assets of Oakey Bhd, Narrabri Bhd
calculated that it has acquired goodwill of RM240,000. The goodwill was allocated to each of
the division and the assets and liabilities acquired measured at fair value at acquisition date.

At 31 December 2021, the carrying amounts of the assets of the toy train division were:

RM
Factory 250,000
Inventory 150,000
Brand - Froggy 50,000
Goodwill 50,000

There is a declining interest in toy trains because of the aggressive marketing of computer-
based toys, so the management of Narrabri Bhd measured the recoverable amount of the toy
train division at 31 December 2021, determining it to be RM423,000.

Required:
Prepare the journal entries to account for the impairment loss at 31 December 2021.

Question 2

Tango Bhd has determined that its fine china division is a cash generating (CGU). The carrying
amount of the assets at 30 June 2022 are as follows:

RM
Factory 210,000
Land 150,000
Equipment 120,000
inventory 60,000

Tango Bhd calculated the recoverable amount of the division to be RM510,000.

Required:
Provide journal entry (ies) for the impairment loss, assuming that the fair value less cost of
disposal of the land are a) RM140,000 and b) RM145,000.

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Question 3

Miles Bhd has two divisions, Jericho and Jackson. Each of these is regarded as a separate cash-
generating unit. At 31 December 2020, the carrying amounts of assets of the two divisions
were:

Jericho Jackson
RM RM
Plant 1500 1200
Accumulated depreciation (650) (375)
Patent 240 -
Inventory 54 75
Receivables 75 82
Goodwill 25 20

The receivables were regarded as collectable, and the inventory’s fair value less cost of disposal
was equal to its carrying amount. The patent has a fair value less costs of disposal of RM220.
The plant as Jericho was depreciated at RM300 p.a. and that at Jackson was depreciated at
RM250 p.a.

Miles Bhd undertook impairment testing as 31 December 2020, and determined the
recoverable amounts of the two divisions to be:

RM
Jericho RM1,044
Jackson RM990

As a result, management increased the depreciation of the Jericho plant from RM300 to RM350
p.a. for the 2020.

By 31 December 2021, the performance in both divisions had improved and the carrying
amounts of the assets of both divisions and their recoverable amounts were as follows:

Jericho Jackson
Carrying amount RM1,322 1,433
Recoverable amount RM1,502 1,520

Required:
Determine how Miles Bhd should account for the results of the impairment tests at both 31
December 2020 and 31 December 2021.

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Question 4

At 30 June 2021. Reacher Bhd reported the following assets:

RM
Land 50,000
Plant 250,000
Accumulated depreciation (50,000)
Goodwill 8,000
Inventory 40,000
Cash 2,000

All assets are measured using the cost model. At 30 June 2021, the recoverable amount of the
entity, considered to be a single cash-generating unit, was RM272,000. For the period ending
30 June 2022, the depreciation charge on plant was RM18,400. If the plant had not been
impaired the charge would have been RM25,000.

At 30 June 2022 the recoverable amount of the entity was calculated to be RM13,000 greater
than the carrying amount of the asset of the entity. As a result Reacher Bhd recognized a
reversal of the previous year’s impairment loss.

Required:
Prepare the journal entries relating to impairment at 30 June 2021 and 2022.