Question 4 [12 marks]

Topic 6: Impairment of assets

Mata Mata Ltd has a business operation that represents a separate cash-generating unit (CGU). At 30 June 2018, the carrying amounts of the assets of the CGU, valued pursuant to the cost model, are as follows:

Plant and equipment

600000

Less: accumulated depreciation

(150000)

Goodwill

20000

Land

150000

Total non-current assets 620

620000

Cash

21000

Inventories

12000

Trade receivables

10000

Total current assets

43000

Total assets

663000

Liabilities

(28000

Net assets

635000

The directors of Mata Mata Ltd estimate that, as at 30 June 2018, the fair value less costs to sell the CGU amounts to $530,000, while its value in use is $575,000. The receivables are regarded as collectible and inventory is recorded at the lower of cost and net realisable value. On the same date, the land has a fair value less costs to sell of $130,000.

During the year ended 30 June 2019, due to some changes in their marketing strategies, the directors of Mata Mata Ltd assessed that the recoverable amount of the CGU to be $15,000 greater than its carrying amount. As a result, Mata Mata Ltd recognised a reversal of the impairment loss.

Prior to the impairment exercise on 30 June 2018, the plant and equipment had a cost of $600,000 and depreciated using straight-line basis over a useful life of 4 years with no residual value. Subsequent to the impairment exercise, the asset is to be depreciated over the remaining useful life of 3 years with no residual value.

Required:

A. For the year ended 30June 2018, determine how Mata Mata Ltd should account for the results of the impairment test and prepare all necessary journal entries. Explain your answers where necessary. B. For the year ended 30June 2019, determine how Mata Mata Ltd should account for the reversal of the impairment loss and prepare all necessary journal entries. Explain your answers where necessary.

Important tips:

Make sure you show all workings to support your answers. Ensure you have substantiated all your figures with explanation, where relevant. In preparing your journal entries, narrations are not required