Because net current assets are always shown at the lower of cost and net realisable value and, for impairments, we mustn’t reduce the carrying value of assets to an amount that is lower than their net realisable value

“how to figure out the discounted figure “77,312”?” = $30,000 for each of 3 years discounted at 8% cost of capital

After 1 year that $30,000 is worth $30,000 x 1/1.08 = $27,777

After 2 years that $30,000 is worth $30,000 x 1/1.08 x 1/1.08 = $25,720

After 3 years that $30,000 is worth $30,000 x 1/1.08 x 1/1.08 x 1/1.08 = $23,815

So the $30,000 for 3 years has a cumulative value of $77,312 value in use

“moreover, the recoverable amount should be $88,300?” – the recoverable amount is the higher of value in use and net selling price

Net selling price is $88,700 (having deducted the costs of dismantling and delivery) so recoverable amount is $88,700

This is compared with the carrying value (calculated as $88,300 and that figure itself is calculated as ($97,000 – $10,000 scrap value) less depreciation of 4 months out of remaining estimated useful life of 40 months

So $87,000 x 4/40 = $8,700 depreciation and thus the carrying value as at 30 June must be $97,000 – $8,700 = $88,300

And this figure of $88,300 is lower than the recoverable amount so no impairment is necessary

120,000 is the carrying value of 2 engines so 60,000 is the carrying value of number 2 engine

Tracks and stations had a carrying value of 90,000

Engine number 1 is written down to 10,000, the brand is impaired down to 65,000, goodwill is written off and there’s no change to the net current assets

So the 2 categories that will share the remaining 25,000 impairment are the remaining engine of 60,000 and the tracks and stations of 90,000

60,000/150,000 x 25,000 = $10,000 impairment for engine number 1 and

90,000/150,000 x 90,000 = $15,000 impairment for the tracks and stations

I don’t understand why there is no impairment in question 3.

If carrying amount > recoverable amount then there should be impairment and this is the case: 88.300 > 87.700.

Is the value in use really only 77.312? What about scrapping? Shouldn’t it count as net cash flow paid for the disposal of the asset? Should disposal paid also be discounted?

Telepath Co also owns Rilda Co, a 100% subsidiary, which is treated as a cash generating unit. On 30 September 20X3, there was animpairment to Rilda’s assets of $3,500,000. The carrying amount of the assets of Rilda Co immediately before the impairment were:

$ Goodwill 2,000,000 Factory building 4,000,000 Plant 3,500,000 Receivables and cash (at recoverable amount) 2,500,000 __________ 12,000,000 __________ What is the carrying amount of Rilda Co’s plant at 30 Sept 20X3 after the impairment loss has been correctly allocated to its assets?

sushmitha says

Hello Mike,

Can you explain the carrying amounts you’ve taken for question 2 and also the workings?

Thanks

MikeLittle says

Reduce damaged engine to 10, reduce the brand to 65, reduce goodwill to zero and we still need to impair by a further 25

So allocate that 25 on a pro rata basis against engine 2 and tracks 10:15

Ok?

max says

Hi Mike, why is net current assets not impaired for the further 25?

MikeLittle says

Because net current assets are always shown at the lower of cost and net realisable value and, for impairments, we mustn’t reduce the carrying value of assets to an amount that is lower than their net realisable value

OK?

telecel says

i cant understand how the nsp was calculated hence (92450-4750) how was the 92450 calculated?

MikeLittle says

My mistake … it should be $93,450 – $4,750 = $88,700

OK?

Three Gold says

Mike, could you please explain Q3 every detail?

you omit several steps, so I can’t understand the working fully.

moreover, the recoverable amount should be $88,300?

how to figure out the discounted figure “77,312”?

I know the greater one is $88,300, but suddenly impairment loss is Nill?

what is the cv?

MikeLittle says

“how to figure out the discounted figure “77,312”?” = $30,000 for each of 3 years discounted at 8% cost of capital

After 1 year that $30,000 is worth $30,000 x 1/1.08 = $27,777

After 2 years that $30,000 is worth $30,000 x 1/1.08 x 1/1.08 = $25,720

After 3 years that $30,000 is worth $30,000 x 1/1.08 x 1/1.08 x 1/1.08 = $23,815

So the $30,000 for 3 years has a cumulative value of $77,312 value in use

“moreover, the recoverable amount should be $88,300?” – the recoverable amount is the higher of value in use and net selling price

Net selling price is $88,700 (having deducted the costs of dismantling and delivery) so recoverable amount is $88,700

This is compared with the carrying value (calculated as $88,300 and that figure itself is calculated as ($97,000 – $10,000 scrap value) less depreciation of 4 months out of remaining estimated useful life of 40 months

So $87,000 x 4/40 = $8,700 depreciation and thus the carrying value as at 30 June must be $97,000 – $8,700 = $88,300

And this figure of $88,300 is lower than the recoverable amount so no impairment is necessary

OK?

Mohammed Saiful Islam says

ok

Pankrajsingh says

How to calculate the 4 months of depreciation to answer the answer of 88300 in question 3??

carrying amount= 97000- 4 months of depreciation= 88300

MikeLittle says

Have you overlooked the estimated scrap value of $10,000?

($97,000 – $10,000) x 4 / 40 = $8,700

$97,000 – $8,700 = $88,300

OK?

Richard says

Hi

Of all the questions in these chapters how close are they to actual exam questions

MikeLittle says

Richard, check out the specimen exams and, so far as they are available, the past exams where mcqs are shown

NB, even if they may not be similar to past exam questions, the principles are important so you can apply those principles to exam question scenaria

ismael says

Hi Mike,

Question 4… Why when market interest rates fall, value in use of an asset increases? Would you be able to explain that in a different way?

After thinking for a while, I cannot see that unfortunately…

Thanks

Ismael

MikeLittle says

When interest rates fall, the value in use calculation falls because it’s calculated as the PRESENT value of future flows

Say you have a future flow in one year’s time of $1,000 and a cost of capital of 10%

The present value of that flow is $909,09

If the cost of capital falls to, say, 8%, the present value of that same $1,000 would be $925.93

OK?

Hint – in situations like this it often helps to put made-up figures into a calculator and see the results after “What happens if …”

ismael says

Thank you for your quick reply. With your example I understand the concept now. Thanks.

bryan says

question 3 is confusing need help

Olga says

How did we apportion 25 000 between engine 2 and traks in Q2????

MikeLittle says

60 : 90

120,000 is the carrying value of 2 engines so 60,000 is the carrying value of number 2 engine

Tracks and stations had a carrying value of 90,000

Engine number 1 is written down to 10,000, the brand is impaired down to 65,000, goodwill is written off and there’s no change to the net current assets

So the 2 categories that will share the remaining 25,000 impairment are the remaining engine of 60,000 and the tracks and stations of 90,000

60,000/150,000 x 25,000 = $10,000 impairment for engine number 1 and

90,000/150,000 x 90,000 = $15,000 impairment for the tracks and stations

OK?

sneha says

How this ratio came 60:90

MikeLittle says

That’s explained immediately before your post!

waszpawel says

In question 2. Why the goodwill is fully imapaired?

MikeLittle says

Because that’s what we do when considering impairments!

1) any individual asset

2) goodwill

3) pro-rata amongst the rest

Isabelle says

please elaborate on what an individual asset means because I thought an engine counts as an individual asset

waszpawel says

I don’t understand why there is no impairment in question 3.

If carrying amount > recoverable amount then there should be impairment and this is the case: 88.300 > 87.700.

Is the value in use really only 77.312? What about scrapping? Shouldn’t it count as net cash flow paid for the disposal of the asset? Should disposal paid also be discounted?

MikeLittle says

I think recoverable amount is $88,700 and not $87,700

In'utu says

Hi, I need help with the right amount of depreciation in the answer.

shouldn’t it be 97000/40×4

MikeLittle says

Which question?

Mansur says

Question 2 ias36? How engine 1 came?

Aristea says

hi,

can you please explain in Q3 how the 77312 cames up?

30.000*1/1,08 per year *3? because it costs 83.333..

thanks

MikeLittle says

30.000*1/1,08 per year *3?

What you have done is take the first year’s present value and multiplied by 3

You may as well have taken 90.000*1/1,08!

What you should have done is….

find the present value of $30,000 after 1 year

find the present value of $30,000 after 2 years

find the present value of $30,000 after 3 years

and add them together

OK?

Maria says

Is the amount of 92.450 in the answer given wrongly instead of 93.450?

MikeLittle says

Yes, it’s in the process as I write of being amended

robymano says

HOW CAN I DOWNLOAD SOME OF THE QUESTIONS

MikeLittle says

You can’t, sorry.

But you can try them as often as you want 🙂

MikeLittle says

Better if you put your question on the Ask ACCA Tutor for F7!

Tikologo says

Telepath Co also owns Rilda Co, a 100% subsidiary, which is treated as a cash generating unit. On 30 September 20X3, there was animpairment to Rilda’s assets of $3,500,000. The carrying amount of the assets of Rilda Co immediately before the impairment were:

$

Goodwill 2,000,000

Factory building 4,000,000

Plant 3,500,000

Receivables and cash (at recoverable amount) 2,500,000

__________

12,000,000

__________

What is the carrying amount of Rilda Co’s plant at 30 Sept 20X3 after the impairment loss has been correctly allocated to its assets?

Please assist.

MikeLittle says

$2,800!

$3,500 – (3,500/7,500*$1,500)

OK?

Where’s this question from – it’s not one of mine!

If not, then it should be in the Ask ACCA Tutor forum and not as a question unrelated to the chapter questions that are the basis of this thread

Tikologo says

Thanks mike,this is in sept 2016 specimen.

Where is 7500 and 1500 come from?

MikeLittle says

Post this on the Ask ACCA Tutor forum page for F7 … it has nothing to do with the flash cards!

Nabil says

can u guys plz help me

i’m stuck in the ques no 3 in revision question IAS 36???