Question 2

Sydney Drome Ltd is started a company to undertake research and development of a new type of drome. For this research and development (R & D) it has incurred the following expenditure in June 2020:

Transaction

Amount

Payment status

1. Obtaining a general understanding of wind-flow dynamics

$25,000

Paid

1. Understanding what local customers expect from a drome

$15,000

Incurred

1. Testing and refining a certain type of drome

$45,000

Incurred

1. Developing and testing a full prototype of the drome, to be called the 'invisible drome'.

$95,000

Incurred

1. Marketing of the drome

$60,000

Paid

It is expected that there is a large market for the dromes, which will generate millions of dollars in revenue.

On 1 July 2020 Sydney Drome Ltd acquired Solar Dromes Ltd for cash of $10,000,000. At that date, Solar Drome's net identifiable assets had a fair value of $8,700,000. The fair value of the net identifiable assets of Solar Dromes are determined as follows:

Customer list

$75,000

Machinery

$2,175,000

Buildings

$2,250,000

Land

$4,500,000

$9,000,000

Less: Bank loan

$300,000

Net assets

$8,700,000

At the end of the reporting period of 30 June 2020, Solar Drome Ltd determines that the recoverable amount of the cash-generating unit, which is considered to be Solar Dromes Ltd, totals $9,000,000. The carrying amount of the net identifiable assets of Solar Dromes Ltd, which excludes goodwill, has not changed since acquisition and is $8,700,000.

REQUIRED:

1. Prepare journal entries for each transaction from a to e above. (5 marks)
2. Calculate the amount for impairment of goodwill as at 30 June 2020. Show all workings.(2 marks)
3. Prepare journal entries to record impairment of goodwill as at 30 June 2020. (1 mark)