Question 5 [15 marks]

Impairment of assets

Gadgets Ltd has a division that represents a separate cash generating unit. At 30 June 2016, the carrying amounts of the assets of the division, valued pursuant to the cost model, are as follows:

Assets:	$
Cash	242,000
Plant and equipment	600,000
Less: accumulated depreciation	(200,000)
Land	800,000
Inventory	190,000
Accounts receivable	67,000
Patent	200,000
Goodwill	10,000
Carrying amount of cash generating unit	1,909,000

The receivables were regarded as collectable, and the inventorys fair value less costs to sell was equal to its carrying amount. The patent has a fair value less costs to sell of $180,000, and the land has a fair value less costs to sell of $780,000.

The directors of Gadgets estimate that, at 30 June 2016, the fair value less costs to sell of the division amounts to $1,750,000, while the value in use of the division is $1,840,000.

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 2017.

By 30 June 2017, the recoverable amount of the cash generating unit was calculated to be $20,000 greater than the carrying amount of the assets of the unit.

Required:

Determine how Gadgets Ltd should account for the results of the impairment test at 30 June 2016 and 30 June 2017, and prepare any necessary journal entries. Show all workings and provide references to the relevant accounting standard to support your answer.

Marking Guide - Question 5	Max. marks awarded
Journal entries, calculations and workings for 2016	7.5
Journal entries, calculations and workings for 2017	7.5