Shiraz Ltd owns all the issued shares of Merlot Ltd.
At 31 December 2008 the carrying amount of the assets of Merlot are as follows, including the amount of goodwill purchased on acquisition.
Land $400 000
Plant $600 000
Accumulated depreciation (Plant) ($150 000)
Accounts Receivable $100 000
Motor Vehicles 475 000
Accumulated depreciation (Motor Vehicles) $25 000
Goodwill $50 000
As Merlot is a Cash Generating Unit it was subject to impairment testing and its recoverable amount was found to be $910 000, and the fair value less costs to sell for the land was found to be $385 000.
In addition Shiraz Ltd also sold a separate Block of Land (i.e. Not a part of the
Merlot CGU) details as follows:
- Purchased 1 January 2007 for $500 000
- 1 January 2008 revalued to $540 000
- Sold 31st December 2008 for $580 000.
a. Prepare the necessary journal entries need to make the adjustments required as a result of the above for 31 December 2008 in regards to Merlot Ltd.
b. Explain in your own words what factors Shiraz Ltd would have considering when conducting the impairment test of Merlot Ltd.
c. Prepare the journal entries in regards to the separate block of land for the year ending 31 December 2008.
Guidelines for creating journal entries are provided in the solution. The use of the impairment test is also discussed.