Question 1

Ben has just been appointed the managing director of Fresh Limited, a retailer of fresh vegetables. Ben has great experience in this industry and has been appointed to help turn the company around however he has limited financial experience. The auditors have requested him to review the assets and perform impairment testing where there are indicators of impairment. Ben has come to you the accountant requesting help and requested the following information from you.

Draft a memo to Ben which includes this information:

a) What is an indicator review, what information should be considered and when is it performed?

b) What is recoverable amount and under what circumstances would we need to calculate the assets recoverable amount?

c) What is the difference between fair value less costs of disposal and value in use?

d) What is an impairment loss?

e) One of the assets is of concern and i am not sure whether it needs to be impaired, please let me know whether it is and if yes, what journal entry will be required to be processed in this regard. Remember, we use the cost model for the valuation of our assets.

Canning Machine

Carrying amount 31 December 2019 R230 000

Value in use R143 244

Expected selling price R220 000

Cost of delivery to potential customer R17 500

Legal costs involved in the sale R12 000