Reference no: EM131048017
Impairment of assets
Jack Ltd has a division that represents a separate cash generating unit. At 30 June 2015, the carrying amounts of the assets of the division, valued pursuant to the cost model, are as follows
| Assets: |
$ |
| Cash |
42,000 |
| Plant and equipment |
600,000 |
| Less: accumulated depreciation |
(120,000) |
| Land |
800,000 |
| Inventory |
90,000 |
| Accounts receivable |
27,000 |
| Patent |
150,000 |
| Goodwill |
10,000 |
| Carrying amount of cash generating unit |
1,599,000 |
The receivables were regarded as collectable, and the inventory's fair value less costs to sell was equal to its carrying amount. The patent has a fair value less costs to sell of $140,000, and the land has a fair value less costs to sell of $825,000.
The directors of Jack estimate that, at 30 June 2015, the fair value less costs to sell of the division amounts to $1,500,000, while the value in use of the division is $1,560,000.
As a result, management increased the depreciation of the plant and equipment from $40,000 p.a. to $45,000 for the year ended 30 June 2016.
By 30 June 2016, the recoverable amount of the cash generating unit was calculated to be $55,000 greater than the carrying amount of the assets of the unit.
Required:
Determine how Jack Ltd should account for the results of the impairment test at 30 June 2015 and 30 June 2016, and prepare any necessary journal entries. Show all workings and provide references to the relevant accounting standard to support your answer.