QUESTION 5 GROUP FINANCIAL STATEMENTS

5.2. On 1 January 2020 Company A acquired a 70% controlling interest the ordinary share capital of Company B.

Machinery that was purchased for R4 000 000, with a carrying amount of R3 700 000, was considered to be undervalued by R600 000. The machine has a remaining using life of 5 years and carries no residual value.

The summer rain in the Limpopo region resulted in multiple flash floods on Company Bs premises. The machine that was undervalued on the date Company A acquired its interest in Company B has been severely affected by these flash floods. Subsequently, there has been a significant reduction in production capacity of this machine and this is due to the constant breakdowns and repairs that have been required since the floods

On 30 September 2020, a mechanical specialist has assessed the condition of the machine and has determined the value in use of this machine as R2 400 000, however this machine has a fair value of R2 000 000 and the cost to sell is negligible.

The group accountant is uncertain about the pro-forma journal entry that needs to be processed in response to the mechanical specialists assessment. The following journal entry was processes by the group accountant:

Dr: Impairment loss (SP&L) 1 255 000

Cr: Accumulated Impairments (SFP) 1 255 000

Accounting for the impairment of the machine

REQUIRED: Review the pro-forma entry processed by the Group Accountant as it relates to the impairment of the machine in Company B. Discuss the error made by the group accountant; explain what the correct group accounting treatment should be in respect of the impairment; and propose an appropriate, correcting journal entry

(15 marks)