Impairment
FINANCIAL ACCOUNTING 3
QUESTIONS: IMPAIRMENT OF ASSETS
APRIL2009
QUESTION 3 (8 MARKS)
SA Works Limited is a small listed company producing specialized equipment to
be used to exploit diamonds.
It is the company’s policy to show machinery at cost less accumulated
depreciation and accumulated impairment losses. (Cost model.) If the machinery
was revalued, it will be shown at the revalued amount less accumulated
depreciation and accumulated impairment losses.
The financial year end of the company is 31 December.
The following information is supplied to you:
1 January 2006:
A machine which is used in the manufacturing of the specialized equipment, was
acquired at a cost of R950 000. The machine had an estimated useful life of 5
years. The estimated residual value of the machine has a present value of R50
000.
1 January 2008:
The machine was re-valued on this date at R740 000, with an estimated
remaining useful life of 4 years. The estimated residual value of the machine has
a present value of R40 000.
31 December 2008:
It was established that the net selling price of the machine amounted to R500
000 and the value in use to R480 000. The management decided to impair the
machine.
REQUIRED:
3.1 Use the table supplied and calculate the following values of the
machine:
3.1.1 On 31 December 2007:
The historic carrying value. (3)
3.1.2 On 31 December 2008:
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Impairment
The actual carrying value and the historic carrying value before any
impairment loss was taken into account.
NOTE: Use the re-allocation approach to calculate the depreciation
for the financial year ending 31 December 2008. (3)
3.1.3 On 31 December 2008:
The actual carrying value after impairment loss was taken into (2)
account.
APRIL 2008
QUESTION 3 (6 MARKS)
B Tex Limited is a small listed company producing stationery. The financial year
end of the company is 31 December.
A machine was acquired on 1 July 2005 at a cost price of R350 000. At that
stage the estimated useful life of the machine was estimated at 6 years. The
estimated residual value is estimated at R50 000.
The machine was re-valued on 1 January 2007 at R310 000, with an estimated
remaining useful life of 5 years at that date, and an estimated residual value of
R40 000.
At 31 December 2007 an impairment was done and it was established that the
machine had a net selling price of R200 000 and a value in use of R150 000.
REQUIRED:
Use the supplied table and calculate the following values of the
machine:
3.1 On 31 December 2006:
The actual carrying value and historic carrying value. (2)
3.2 On 31 December 2007:
The actual carrying value and the impairment loss. (4)
3.3 On 31 December 2008:
The actual carrying value and the impairment loss/reversal of (4)
impairment loss, if the recoverable amount is R180 000.
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Impairment
NOTE: Use the re-allocation approach for the above calculations.
APRIL 2010
QUESTION 3 (21 MARKS)
On 1 March 2003, Korex Ltd purchased a new equipment for R 770 000 and
brought it into usage the same day. The expected useful life is five years, with a
residual value of R 20 000.
Korex Ltd depreciates equipment using a straight line method. The tax
authorities agree to the same rate for tax purposes.
While preparing the financial statements for the year ended 28 February 2005,
management was of the opinion that the equipment might be impaired. The
market price for similar equipment in the same condition will be R 420 000 after
taking the cost to dispose into consideration. The present value of future inflows
from the use of the equipment over the remaining useful life amounted to R 380
000.
On 28 February 2007, there is an indication that the recoverable amount might
be more that the present carrying amount. On this date, the fair value less cost
to sell was R 160 000 and the value in use was R 172 000.
The other non-current asset owned by Korex Ltd is a land (3 450 square meters
on Erf 501, Observatory, Cape Town) used for parking vehicles; which was
purchased on 2 March 2004 for R 3 200 000. It has never been revaluated ever
since.
REQUIRED:
3.1 Calculate, using the criteria in IAS 36, whether or not the equipment is
impaired at 28 February 2005. (4)
3.2 Using the supplied table, calculate the ACA (actual carrying amount) and
the HCA (historical carrying amount) until 28 February 2007. Also
indicate if impairment should be reversed and for what amount. (9)
3.3 Assume that there was an impairment reversal of R5 000 on 28 February
2007. Prepare the journal entry for the reversal. (2)
3.4 Show the following notes to the financial statements for the year ended
28 February 2007:
- Policy note for property, plant and equipment (6)
- Profit before tax
Note: Round all amounts off to the nearest Rand.
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Impairment
MARCH 2011
QUESTION 3 (14 MARKS)
IGNORE DEFERRED TAX IN THIS QUESTION
Cape Garden Equipment Limited is a company producing garden implements.
Its financial year end is 31 December.
The accounting policy of Cape Garden Equipment Limited relating to the
machinery used to produce the equipment reads as follows:
“Machinery is carried at cost less accumulated depreciation and accumulated
impairment losses. Depreciation is provided at 20 % per annum on the straight
line basis.”
The company purchased an item of specialised machinery at a cost of R800 000
on 1 January 2007.
Details regarding this machine follow:
1. At 31 December 2007, significant developments in
technology by competitors led management to assess the
recoverable amount of the equipment. The fair value less
cost to sell was estimated at R440 000 and the value in use
was determined to be R380 000.
2. Towards the end of the 2009 financial year, it became
apparent that the competitors’ new technology developed in
2007 was not commercially viable. The recoverable amount
was assessed again and based on market prices,
management estimated the fair value less costs to sell to be
R500 000 and the value in use to be R400 000.
3. The estimated useful life has remained unchanged
throughout. The residual value is estimated to be nil
(unchanged).
Profit before tax for the year ended 31 December 2009 before accounting for any
expenses or income relating to the machinery amounts to R300 000.
REQUIRED:
3.1 Using the supplied table, calculate the ACA (actual carrying amount) and
the HCA (historical carrying amount) for the period 1 January 2007 till
31 December 2009. Test for impairment of the asset, where applicable,
and take into account the amount for any impairment/reversal of
impairment. (9)
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Impairment
3.2 Prepare the journal entry/entries relating to the machinery for the year
ended 31 December 2009. (5)
Note:
• Round all amounts off to the nearest Rand.
Use the re-allocation approach to calculate the depreciation for the
financial years ended 31 December 2008 and 2009.
MARCH 2013
QUESTION 3 (18 Marks)
Night Ltd is a small listed company producing components for satellites that
monitor pollution levels across the globe. Its financial year end is 31 December.
The following information was extracted from the draft statement of financial
position of Night Limited at 31 December 2012:
ASSETS 1 710 000
Non-current assets:
Land 950 000
Plant and machinery (carrying amount) 700 000
Office equipment (carrying amount) 60 000
Current assets: 35 000
1 745 000
EQUITY AND LIABILITIES
Share capital and reserves (100 000 ordinary shares in
issue.) 1 525 000
Non-current liabilities 200 000
Current liabilities 20 000
1 745 000
Additional information:
1. Plant and machinery:
1.1 The plant and machinery was acquired on 3 January 2011 for R900 000.
The company depreciates its plant and machinery over its estimated
economic useful life of 8 years on a straight-line basis. On 3 January
2011 the residual value of the plant and machinery had a present value of
R100 000.
1.2.1 Significant developments in technology of this type of plant and
machinery, led management to belief that the asset should be impaired.
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Impairment
An independent valuer was appointed and the following findings were
supplied:
• At 1 January 2012 the remaining useful life of the plant and machinery
was estimated to be 4 years and the residual value is zero.
• At 31 December 2012 the fair value of plant and machinery amounted
to R580 000 and the cost to sell of the plant and machinery was
estimated at R20 000 and the value in use of the plant and machinery
was determined as R540 000.
The information in 1.2.1 was not taken into account in the draft
statement of financial position.
2. Office equipment:
2.1.1 On 1 January 2012 office equipment had a carrying amount of R85 000.
(Cost R125 000.)
The company depreciates office equipment at a rate of 20 % per annum
using the straight-line method.
2.1.2 On 30 December 2012 the company sold office equipment at a profit of
R4 000. The office equipment was purchased on 1 July 2010 at a cost of
R16 000.
The information in 2.1.2 was not taken into account in the draft
statement of financial position.
YOU ARE REQUIRED TO:
3.1 Calculate the actual and historical carrying amount of plant and machinery
at 31 December 2012 and indicate the impairment, if any. (7)
3.2 Prepare the following notes to the financial statements of the company at
31 December 2012 in compliance with International Financial Reporting
Standards:
-Accounting policy note for property, plant and equipment
-Profit before tax
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Impairment
-Property, plant and equipment note, only disclosing the office equipment
for the year ended 31 December 2012. (11)
JUNIE 2016
QUESTION 1 (16 marks)
On 1 January 20x1 Xoli Ltd acquired a second-hand delivery truck for R30 000.
Management estimated the useful life of the truck at nine years with R3 000
residual value. Xoli Ltd determined that straight-line depreciation is appropriate.
In 20x2, because of a sharp decrease in demand for deliveries, Xoli Ltd
dramatically decreased its use of the truck. Consequently, at 31 December 20x2,
management re-estimated the truck’s total useful life at 7 years, during which the
truck was expected to provide a present value of net cash flows of R18 000.
At 31 December 20x2 the selling price for the truck was R19 000. If the truck
was sold, license and other fees of R700 would be paid.
1.1
REQUIRED:
Determine the amount of impairment loss, if any, for Xoli Ltd’s truck at 31
December 20x2. Show the depreciation calculations in brackets.
(6)
1.2
Assume the actual carrying amount at 31 December 20x2 is R20 000
By 31 December 20x4 the demand for deliveries had recovered and there was
improved demand for the delivery service provided. Management estimated that
the truck’s residual value is R4 000 and the present value of the net cash flows is
determined as R17 800. At 31 December 20x4 the net selling price for Xoli Ltd.’s
truck was R19 800.
REQUIRED:
Determine the amount of impairment loss/reversal of impairment loss on
31 December 20x4. Show the depreciation calculations in brackets.
(6)
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Impairment
1.3
REQUIRED:
Prepare the journal entry for the impairment loss/reversal and disclose the note
for “Profit before tax” on 31 December 20x4.
(4)
