Question
Timmons Limited built a plant facility and started commercial production in January 2014. The plant facility had a capital cost of $4,600,000. The capital assets
Timmons Limited built a plant facility and started commercial production in January 2014. The plant facility had a capital cost of $4,600,000. The capital assets were depreciated, starting in 2014, on a straight-line basis assuming a residual value of 10% of the original cost, a 20-year useful life for the plant facility. Timmons claimed a full year of depreciation in 2014.
In December 2018, the market for Timmons products declined precipitously because of a significant improvement in similar new competing products that are being sold for a lower price. Operations in the plant were temporarily suspended while inventory was reduced.
Assume that the plant facility is an asset group for the purposes of determining a write down, if any.
The fair value of this asset group is $3,449,080. If the asset group were sold, Timmons would incur a 2% brokerage fee along with legal and other selling costs of $144,000.
The following probability-weighted future cash flow information is available (assume all cash flows occur at the end of the year, unless otherwise noted):
Year ===> | Dec2019 | Dec2020 | Dec2021 | Dec2022 | Dec2023 | |||||
CASH FLOWS | ||||||||||
Sales revenue | 1,300,000 | 1,300,000 | 1,300,000 | 1,300,000 | 1,300,000 | |||||
Cost of goods sold | (650,000) | (650,000) | (650,000) | (650,000) | (650,000) | |||||
Other operating costs | (29,000) | (29,000) | (29,000) | (29,000) | (29,000) | |||||
621,000 | 621,000 | 621,000 | 621,000 | 621,000 | ||||||
The relevant discount rate is 7%. Because of the various changes in the business, Timmons anticipates that it will now use the plant facility and equipment until December 2023, after which it will shut down.
REQUIRED:
Assume the assets are being accounted for under the cost model (as opposed to the revaluation model). Answer the following questions:
- Under IFRS, what is the equivalent terminology for an asset group when considering impairment of property, plant and equipment? Do not use an abbreviation.
- What is the definition of recoverable amount? Compute the recoverable amount of the CGU in this question. Show your work.
- Ignore your answer to part 2. Assume the value in use amount for this CGU is $3,300,000. Prepare the journal entry to record the write down of this CGU.
- Under IFRS, can this impairment write down be reversed?
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