Case Question – Wandsworth PLC
Information relevant to questions 39 – 43
Wandsworth PLC has a year end of 31 December and operates a factory which primarily involves in steel production. Wandsworth PLC purchased a machinery on 1 July 20X3 for $240,000 which had a useful life of ten years and is depreciated on the straight‐line basis, time apportioned in the years of acquisition and disposal. The machine was revalued to $243,000 on 1 July 20X4. There was no change to its useful life at that date.
A fire at the factory on 1 October 20X6 damaged the machine, leaving it with a lower production output. The senior accountant considers that Wandsworth PLC will need to recognise an impairment loss in relation to this damage and has ascertained the following information at 1 October 20X6:
(1) The carrying amount of the machine is $182,250.
(2) An equivalent new machine would cost $270,000.
(3) The machine could be sold in its current condition for a gross amount of $135,000. Dismantling cost would amount to $6,000.
(4) In its current condition, the machine could operate for three more years which gives it a value in use figure of $116,055.
1. In accordance with IAS 16 Property, Plant and Equipment, what is the depreciation charged to Wandsworth PLC’s statement of profit or loss in respect of the machine for the year ended 31 December 20X4?
2. IAS 36 Impairment of Assets contains a number of examples of internal and external events which may indicate the impairment of an asset.
In accordance with IAS 36, which TWO of the following would definitely NOT be an indicator of the potential impairment of an asset)?
A. A significant change in the technological environment in which an asset is employed making its software effectively obsolete
B. An unexpected fall in the market value of one or more assets
C. A reduction in Wandsworth PLC’s cost of capital
D. Adverse changes in the economic performance of one or more assets
E. The carrying amount of an entity’s net assets being below the entity’s market capitalization
3. What is the total impairment loss associated with Wandsworth PLC’s machine at 1 October 20X6?
4. The senior accountant has decided that it is too difficult to reliably attribute cash flows to this one machine and that it would be more accurate to calculate the impairment on the basis of the factory as a cash‐generating unit.
In accordance with IAS 36 Impairment of Assets, which TWO of the following are TRUE regarding cash generating units?
A - Assets in a cash‐generating unit should never be impaired below their recoverable amount.
B - There is no need to consistently identify cash‐generating units based on the same types of asset from period to period.
C - A cash‐generating unit to which goodwill has been allocated should be tested for impairment every five years.
D - A cash‐generating unit must be a subsidiary of the parent.
E - A cash‐generating unit is the smallest identifiable group of assets for which independent cash flows can be identified.
Case Question – Canon Co
Information relevant to questions 44–48
(a) On 1 October 2018 Canon Co acquired a plant under the following terms.
On 1 October 2020 Canon Co decided to upgrade the plant by adding new components at a cost of $500,000. This upgrade led to a reduction in the production time per unit of the goods being manufactured using the plant.
6. What amount should be recognised under non-current assets as the cost of the plant?
7. How should the $500,000 worth of new components be accounted for?
8. Every eight years the plant will need a major overhaul in order to keep running. How should this be accounted for?
9. Which of the following is NOT an external indicator of impairment?
Case Question – Bothar
Information relevant to questions 49–53
During the year Bothar started research and analysis work on a new processor chip. Bothar has a past history of being particularly successful in bringing similar projects to a profitable conclusion. In addition to this, Bothar spent $400,000 training staff to use new equipment.
Bothar also developed a new online platform during the year, spending $250,000 a month evenly from 1 February 2019 to 31 October 2019. Bothar was unsure of the outcome of the project, but doubts were resolved on 1 May, following successful testing. The platform launched on 1 November 2019 and was expected to last 10 years.
11. Bothar’s accounts trainee has read something which states that intangible assets are identifiable, non‐monetary items without physical substance.
Which TWO of the following relate to items being classed as identifiable?
A. Items must have a measurable cost
B. Items must be separable
C. Items must have probable future economic benefits
D. Items must arise from legal or contractual rights
12. Which of the following must be capitalised in the preparation of financial statements?
1. Expenditure on processor chip
2. Training for staff
14. Which of the facts relating to the online platform is/are correct?
1. Once capitalised, the development costs should be held at fair value at each year‐end.
2. Depreciation on any plant used to develop the platform would be capitalised as part of the development costs.
3. The online platform will be subject to annual impairment review due to the judgemental nature of the project.
15. Bothar acquired a patent with a 20 year life for $1,800,000 on 1 January 2019. On 31 December 2019, management believed that the patent was less fully utilised than expected and determined the following information as part of their impairment review:
What is the value of the impairment loss in the year ended 31 December 2019?