lOMoARcPSD|29290635
Impairment loss
Accountancy (STI College)
Scan to open on Studocu
Studocu is not sponsored or endorsed by any college or university
Downloaded by Lindsay Catacutan (lindsaycatacutan078@gmail.com)
lOMoARcPSD|29290635
ACTIVITY 1
On January 1, 2018, SME acquired 25% of the equity of each of entities B, C
and D for 1,000,000, 1,500,000 and 2,800,000 respectively. Transaction costs of 1%
of the purchase price were incurred by SME. On January 2, 2018 entity B declared
and paid dividend of 100,000. On December 31, 2018, entity C declared and paid a
dividend of 800,000. For the year ended December 31, 2018, entities B and C
recognized profit respectively of 500,000 and 1,800,000. However, entity D
recognized a loss of 2,000,000. Published price quotations do not exist for the shares
of entities B, C and D. Using appropriate valuation techniques SME determined the
fair value of the investments in entities B, C and D on December 31, 2018 at 1,300,000,
2,900,000 and 1,500,000 respectively. Cost of disposal are estimated at 5% of the fair
value of the investments.
Required:
1. Prepare journal entries to record the investments in associates of SME for the
current year using:
a. Cost model
Jan.1 Investment in B 1,000,000
Investment in C 1,500,000
Investment in D 2,800,000
Cash 5,300,000
Investment in B 10,000
Investment in C 15,000
Investment in D 28,000
Cash 53,000
Jan. 2 Cash (100,000 x 25%) 25,000
Dividend Income 25,000
Dec. 31 Cash 200,000
Dividend Income 200,000
(800,000 x 25%)
Fair value of D 1,500,000
Cost to sell (5%) 75,000
FV less cost to sell 1,425,000
Downloaded by Lindsay Catacutan (lindsaycatacutan078@gmail.com)
lOMoARcPSD|29290635
Carrying amount of D 2,828,000
(2,800,000 + 28,000)
Impairment loss 1,403,000
Impairment loss 1,403,000
Investment in D 1,403,000
b. Equity model
Jan.1 Investment in B 1,000,000
Investment in C 1,500,000
Investment in D 2,800,000
Cash 5,300,000
Investment in B 10,000
Investment in C 15,000
Investment in D 28,000
Cash 53,000
Jan. 2 Cash 25,000
(100,000 x 25%)
Dividend Income 25,000
Dec. 31 Cash 200,000
Investment in C 200,000
(800,000 x 25%)
Investment in B 125,000
Investment income 125,000
Investment in C 450,000
(500,000 x 25%)
Downloaded by Lindsay Catacutan (lindsaycatacutan078@gmail.com)
lOMoARcPSD|29290635
Investment Income 450,000
Investment Loss 500,000
(1,800,000 x 25%)
Investment in D 500,000
(2,000,000 x 25%)
FV less cost to sell of Investment D 1,425,000
Carrying amount of Investment D 2,328,000
(2,800,000 + 28,000-500,000)
Impairment loss 903,000
Impairment loss 903,000
Investment in D 9 903,000
c. Fair value model
Jan.1 Investment in B 1,000,000
Investment in C 1,500,000
Investment in D 2,800,000
Cash 5,300,000
Investment in B 10,000
Investment in C 15,000
Investment in D 28,000
Cash 53,000
Jan. 2 Cash (100,000 x 25%) 25,000
Dividend Income 25,000
Dec. 31 Cash 200,000
Downloaded by Lindsay Catacutan (lindsaycatacutan078@gmail.com)
lOMoARcPSD|29290635
Dividend Income 200,000
(800,000 x 25%)
FV-current C/A (FV previous) Gain (loss)
Investment B 1,300,000 1,000,000 300,000
Investment in C 2,900,000 1,500,000 1,400,000
Investment in D 1,500,000 2,800,000 (1,300,000)
Investment in B 300,000
Investment in C 1,400,000
Gain from change in fair value 1,700,000
Loss from change in fair value 1,300,000
Investment in D 1,300,000
2. Determine the amount of investment in associate to be presented in the
statement of financial position under:
a. Cost model
Investment in B = 1,010,000
Investment in C = 1,515,000
Investment in C = 1,425,000
b. Equity model
Investment in B = 1,110,000
Investment in C = 1,765,000
Investment in D = 1,425,000
c. Fair value model
Investment in B = 1,300,000
Investment in C = 2,900,000
Investment in D = 1,500,000
Downloaded by Lindsay Catacutan (lindsaycatacutan078@gmail.com)
lOMoARcPSD|29290635
ACTIVITY 2
1. On January 1, 2018, an SME acquired a building for 10,450,000 including
500,000 nonrefundable purchase taxes. The purchase agreement provided for
payment to be made in full on December 31, 2018. Legal fees of 220,000 were
incurred in acquiring the building and paid on January 1, 2018. The building is
held to earn lease rentals and for capital appreciation. An appropriate discount
rate is 10%. What is the initial cost of the building?
Answer:
(10,450,000/1.10) + 220,000 = 9,720,000
2. On January 1, 2016, an SME acquired a building for 50,000,000. On December
31, 2016, management assessed that the useful life of the building is 50 years
from the date of acquisition with residual value of 10,000,000. The fair value of
the building on same date is 60,000,000. On December 31, 2018, SME
reassessed that the useful life of the building is 40 years from January 1, 2018
with residual value of 5,000,000. The fair value of the building on December 31,
2018 is 445,000,000. The SME used the cost model in measuring property,
plant and equipment.
a. What is the carrying amount of the building on December 31, 2016?
Answer: 49,200,000
b. What is the depreciation for 2018?
Answer: 1,085,000
c. What is the impairment loss for 2018?
Answer: 2,315,000
d. What is the carrying amount of the building on December 31, 2018 after
recognition of impairment loss?
Answer: 45,000,000
3. At the beginning of the current year, an SME acquired, free of charge, a herd
of 100 cattle by way of government grant when the fair value of the herd was
Downloaded by Lindsay Catacutan (lindsaycatacutan078@gmail.com)
lOMoARcPSD|29290635
1,000,000. The average remaining life of the cattle is expected to be 10 years.
The grant does not impose future performance conditions on the entity. What
amount of income from government grant should be recognized for the current
year?
Answer: 1,000,000
4. On January 1, 2014, an SME acquired a patent for 1,000,000. On December
31, 2014, the management assessed that the useful life of the patent is 20 years
from the date of acquisition. The fair value less cost of disposal of the patent is
1,300,000 on same date. On December 31, 2018, the management assessed
that the useful life of the patent is 14 years from the date of acquisition. The fair
value less cost of disposal of the patent is 600,000 on same date. What is the
amount of impairment loss to be recognized for the patent in 2018?
Answer: 120,000
Downloaded by Lindsay Catacutan (lindsaycatacutan078@gmail.com)
