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Hi Chris,
following is the question from Kaplan Study Text Test your understanding 4.Impairment of assets
Q. The following trial balance relates to Hume at 30 June 20X7:
$ $
Revenue 390,000
Cost of sales 210,600
Distribution costs 6,800
Administration expenses 12,700
Loan interest paid 3,600
Property – cost 150,000
Property – depreciation at 1 July 20X6 38,400
Plant and equipment – cost 176,200
Plant and equipment – depreciation at 1 July 20X6 48,600
Trade receivables 31,600
Inventory – 30 June 20X7 18,100
Bank 1,950
Trade payables 25,400
Ordinary shares $1 50,000
Share premium 9,000
12 % Loan note (issued 1 July 20X6) 40,000
Taxation 1,300
Retained earnings at 1 July 20X6 11,450
–––––– –––––––
612,850 612,850
––––––– –––––––
The following notes are relevant:
1 Property includes land at a cost of $30,000. The building is being
depreciated on a straight-line basis over its estimated useful life of
25 years.
2 Plant and equipment is being depreciated on the reducing balance
basis at a rate of 20% per annum.
3 The balance on plant and equipment included a piece of specialist
machinery that cost $70,000 on 1 July 20X5. On 30 June 20X7, a
fork-lift truck reversed into the machinery causing severe damage.
Hume has identified two possible options:
(i) Sell the machine
A potential buyer has been located, who has indicated that she
would pay 80% of the carrying amount on 30 June 20X7.
However, she has insisted that the machine is repaired before
she buys it. The repair work will be done by Hume’s
employees and will take about 120 hours of skilled labor, the
associated cost with this labor is $2,160.
In addition, Hume will have to deliver the machine to the buyer
at a cost of $2,100 and there will be a single premium
insurance cost of $580 for the journey.
(ii) Repair the machine and continue to use it
The financial controller has estimated that the present value of
cash flows generated from future use (including the repair
cost) amount to $31,800.4 All depreciation is charged to the cost of sales.
5 The directors have estimated the provision for income tax for the
year to 30 June 20X7 at $6,500.
Required:
Prepare the statement of profit or loss for Hume for the year to 30 June
20X7 and a statement of financial position at that date.This is a slightly difficult question and the answer given in the book is also not easy to understand. Can you please provide a youtube video explaining this question? that would be so kind of you.
Hi Deeksha,
I don’t think I could do a recording, it might upset Kaplan. Is there a particular part of it that I can help you with?
To get you started then I’d go with the usual process of copying the numbers from the TB into the SFP and SPL. I’d then work on the tax balance to get some easy marks at the start. Once you’ve done that then I’d look at the land and buildings, depreciating the buildings but not the land.
The hard part is the plant and equipment. What I’d do is I’d remove the 70,000 piece of specialist machinery from the TB balances and depreciate the rest of the plant and equipment. You’ll then have all of the question correct and can have a go at the hard bit a the end, which looks like an impairment.
Let me know how you get on and I can help you out where you’re struggling.
Thanks
OK, so you need to compare the carrying value of the specialist machinery to its recoverable amount. It is then impaired if the CV is greater than the recoverable amount.
The recoverable amount is the higher of the value in use and FV less costs to sell. The value in use information is 3(ii) and the FV less costs to sell information is 3(i).
Have a go using this information and see how you get on. Let me know and I can then help further.
Thanks
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