ACT B430X Week 4 Impairment Of Asset
Q1
Shiplake is preparing its financial statements to 31 March 2012. The following situation has been identified by an impairment team.
Shiplake has an item of earth-moving plant, which is hired out to companies on short-term contracts. Its carrying amount, based on cost model, is $400,000. The estimated fair value of this asset is only $250,000, with associated costs of disposal of $5,000. A recent review of its value in use based on its forecast future cash flows was estimated at $500,000. Since this review was undertaken, there has been a dramatic increase in interest rates that has significantly increased the cost of capital used by Shiplake to discount the future cash flows of the plant.
Required:
Explain how the above information would affect the preparation of Shiplake’s financial statements to 31 March 2012.
Q2
AKB Manufacturing Limited (‘AKB’) is preparing its financial statements for the year ended 31 March 2012. AKB has elected to measure investment properties using the cost model. One of the properties recognised in property, plant and equipment is AKB Theater House, which has a carrying amount of HK$20 million.
AKB feels that its recent strategy to develop its portfolio of properties may not have been a wise decision, as the property market has slumped, with market values falling for most types of properties. In addition an economic recession has caused the property rental market to suffer, and to attract and retain tenants it is necessary to agree rental payments that are much lower than in previous years.
AKB’s management is considering what to do with AKB Threater House. There are two options:
1. Sell AKB Theater House
If this option were taken, management considers that they could sell AKB Theater House for HK$18 million, and would incur selling costs of HK$250,000. The sale would necessitate some reorganisation costs within the business, estimated to be HK$500,000.
2. Keep AKB Theater House
In this case, AKB would continue to rent out
Shiplake is preparing its financial statements to 31 March 2012. The following situation has been identified by an impairment team.
Shiplake has an item of earth-moving plant, which is hired out to companies on short-term contracts. Its carrying amount, based on cost model, is $400,000. The estimated fair value of this asset is only $250,000, with associated costs of disposal of $5,000. A recent review of its value in use based on its forecast future cash flows was estimated at $500,000. Since this review was undertaken, there has been a dramatic increase in interest rates that has significantly increased the cost of capital used by Shiplake to discount the future cash flows of the plant.
Required:
Explain how the above information would affect the preparation of Shiplake’s financial statements to 31 March 2012.
Q2
AKB Manufacturing Limited (‘AKB’) is preparing its financial statements for the year ended 31 March 2012. AKB has elected to measure investment properties using the cost model. One of the properties recognised in property, plant and equipment is AKB Theater House, which has a carrying amount of HK$20 million.
AKB feels that its recent strategy to develop its portfolio of properties may not have been a wise decision, as the property market has slumped, with market values falling for most types of properties. In addition an economic recession has caused the property rental market to suffer, and to attract and retain tenants it is necessary to agree rental payments that are much lower than in previous years.
AKB’s management is considering what to do with AKB Threater House. There are two options:
1. Sell AKB Theater House
If this option were taken, management considers that they could sell AKB Theater House for HK$18 million, and would incur selling costs of HK$250,000. The sale would necessitate some reorganisation costs within the business, estimated to be HK$500,000.
2. Keep AKB Theater House
In this case, AKB would continue to rent out