Reference no: EM133105573
Question - On 1 July 2013, Black Cabs Pty Ltd paid $270,000 to acquire a taxi licence that allows the holder to provide a taxi service in the Sydney metropolitan area. Included in the cost was $10,000 in Stamp Duty (a non-refundable tax) that was paid to the NSW Office of State Revenue. The taxi licence, which is valid for a period of ten years, can be renewed upon payment of a nominal fee. Black Cabs Pty Ltd assesses the useful life of the taxi licence as indefinite. Also on 1 July 2013, Black Cabs Pty Ltd paid $60,000 to acquire a motor vehicle to be used to provide taxi services. The motor vehicle has an estimated useful life of five years and a zero residual value. Black Cabs Pty Ltd uses the cost model to measure both the taxi licence and the motor vehicle and uses the straight-line method of depreciation for the motor vehicle.
In early 2015 a competitor entered the Sydney taxi market. The competitor's business model was based on hiring independent drivers who were connected with customers through a mobile phone app. Despite there being questions about the legality of the competitor's services, concerns were expressed that the taxi industry would be adversely affected. On 30 June 2015, Black Cabs Pty Ltd conducted an impairment test. As at this date, the following information was available:
|
Asset
|
Fair value less costs of disposal
|
Value in use
|
|
Taxi licence
|
$180,000
|
$150,000
|
|
Motor vehicle
|
$27,000
|
$30,000
|
However, in early 2016, it became clear that the competitor was struggling to attract sufficient customers to make their business viable and that the State government was about to introduce legislation that would impose severe restrictions on the competitor. On 30 June 2016, Black Cabs Pty Ltd conducted another impairment test. As at this date, the following information was available:
|
Asset
|
Fair value less costs of disposal
|
Value in use
|
|
Taxi licence
|
$220,000
|
$200,000
|
|
Motor vehicle
|
$20,000
|
$25,000
|
Required -
(a) Explain the terms 'fair value less costs of disposal' and 'value in use'.
(b) Prepare appropriate journal entries for Black Cabs Pty Ltd to record the events on 30 June 2015 and 30 June 2016.