- This topic has 11 replies, 3 voices, and was last updated 8 years ago by
.
- Posts
An enterprise purchases a haulage company for $50,000 on 1 Jan 20X0. The operation consists of an operating license with a net selling price of $10,000 and 5 wagons each with a net selling price of $6,000.
On 1 Jun 20X0, one of the wagons crashed and the insurance company refused to settle any liability due to non disclosure of certain material facts. The wagon was a write-off.
The adverse publicity and operating capacity reduction, reduces the value in use of the business to $25,000. The net selling price of the operating license was diminished to $ 9,500.
What’s the carrying value of the asset after accounting for the impairment losses under IAS 36 ‘ Impairment of Assets’?Goodwill=Nill, license = nil & wagons=$25,000
Goodwill=Nill, license = $9,500& wagons=$15,500
Goodwill=$10,000, license = $9,500 & wagons=$5,500
Goodwill=$5,000, license = $5,000 & wagons=$15,000I can probably do this (hopefully!) but the point here is that it’s not me that will be sitting at that exam desk next month!
Have you no idea WHATSOEVER about how to tackle this?
I shall give you a detailed answer next time if you decide that you have absolutely no idea how to begin
I would say that originally there would have been GW of $10k as OL = $10k and Wagons $30k. Given that the business is now only worth $25000 and OL = $9500 I would say that the Wagons are written down to $15500 and answer 2.
However, who is to say that there is still GW of $10k and the Wagons are written down to $5.5k? I would say that the GW has been lost but perhaps I am wrong.
‘However, who is to say that there is still GW of $10k’
The answer to that question is in this extract from the question itself!
‘An enterprise purchases a haulage company for $50,000 on 1 Jan 20X0. The operation consists of an operating license with a net selling price of $10,000 and 5 wagons each with a net selling price of $6,000.’
Unless by this question ‘However, who is to say that there is still GW of $10k’ you are asking ‘who is to say that all the goodwill has been lost?’
In an impairment situation, we impair first any individual asset that is damaged. In this scenario, it’s the wagon that has crashed ‘one of the wagons crashed and the insurance company refused to settle any liability’
So from having goodwill worth $10,000, a licence worth $10,000 and 5 wagons worth $6,000 each, we now have goodwill worth $10,000, a licence worth $10,000 and only 4 wagons worth $6,000 each
Next to go will be the intangible asset of goodwill and, given the numbers of the remaining value of the business, it’s going to be the entire value of goodwill that is impaired
We had, after the impairment of the crashed wagon, goodwill worth $10,000, a licence worth $10,000 and only 4 wagons worth $6,000 each and the goodwill is impaired in full leaving us with a licence worth $10,000 and 4 wagons worth $24,000
But the licence is also impaired down to $9,500 so now we are left with a licence worth $9,500 and 4 wagons worth $24,000
But the business as a whole is worth only $25,000 and we can’t reduce the value of any asset below its recoverable amount so we can’t take any more from the licence
Therefore the remaining impairment of $8,500 must come off the value of the wagons and now we have goodwill $zero, licence $9,500 and wagons $15,500 and that’s answer B from your original post
What I am not happy about is the extract from your original post that says ‘and 5 wagons each with a net selling price of $6,000.’ because strictly we should not be impairing an asset below its net selling price (in this case, its recoverable amount)
OK?
That was a quote from the question of the original value. At the end we would only have 4 wagons and surely there would have been a depreciation amount to have been deducted off of the $24k anyway (which we are not told). I’m assuming we are talking about impairment here due to the adverse publicity etc in the question itself. This is also why I thought the GW was lost other than the fact that the assets already have to be written down and you can’t have negative GW.
I’m a bit confused as out of the 4 wagons left, they now have a value of $3875 each if the impairment of $8500 comes off. However, the net selling price of each wouldn’t remain at $6k each anyway but surely it is lower than the ‘net selling price’ now? The NSP and recoverable amount are not the same. If they can only recover $3875 per wagon then there is no choice but to write down to this amount?
I haven’t come across a question like this one before so although I had a way of working out the answer I am still trying to get a good understanding of this topic.
Thanks
‘and surely there would have been a depreciation amount to have been deducted off of the $24k anyway’
NO – we are told the (presumably) carrying value or at least the realisable value
‘If they can only recover $3875 per wagon then there is no choice but to write down to this amount?’
????
What are you talking about? I mentioned in my last post that I didn’t like the idea of reducing, by impairment, the carrying value of the wagons below their recoverable amount but the available choices that you gave me left me with no choice – goodwill has to be $zero and the licence has to be $9,500
The only available choice is therefore B
‘I haven’t come across a question like this one before so although I had a way of working out the answer I am still trying to get a good understanding of this topic.
‘I don’t think that you’re going to get a good understanding of the topic from this question! There is a totally misleading expression used twice in here – the assets that are carried at their net realisable value. We are not given value in use so nrv must be taken as recoverable amount and we should not be impairing below recoverable amount … but the answer leaves us no choice
What I mean is that if the wagons are now worth $15500 and there are only 4 left this is the equivalent of £3875 each. This is what the cost of the wagons must be even if it doesn’t make sense.
I’m going to look at other questions.
‘This is what the cost of the wagons must be even if it doesn’t make sense.’
NO! This is NOT what the cost of a wagon must be!
It’s the carrying value and is nothing to do with worth, salability, realisability
It’s a figure for accounting purposes
And I’m still not happy about the question!
By the way, did I get the answer right?
I see, carrying value.
I don’t actually even know where this question came from but I am assuming that you have got this right and that I need to go back and learn some of these terms.
I’m also still not happy with the question and will be going through the old BPP revision kit I have now.
Thanks for your help!
- You must be logged in to reply to this topic.