School of Accountancy

Department of Accounting

QUESTION BANK: SUGGESTED

SOLUTIONS
CACN040 / CACC080
IAS36: IMPAIRMENT

STUDENT NAME:
STUDENT NUMBER:
 QUESTIONS DESCRIPTION PAGE

Question 1 ECHO TEDDY – CACN030 3

Question 2 GOLDEN TREAD – CACN030 6

Question 3 GIVE-A-LOT (adjusted) - CACN030 8

Question 4 ABC Limited – UCT refresher course 10

Question 5 Big Pharma Limited 16

NB! For more practice questions – please refer to the “old” question papers.
On 4TH year level module are integrated and as result it is very unlikely that you will get
a pure IAS 36 question.
QUESTION 1
SOURCE:
TOTAL MARKS:

Part A
Debit Credit
Journal entries - 31/12/2016
1/07/2016
Machinery: Cost (SFP) 5 000 000.00 0.5
Bank (SFP) 5 000 000.00 0.5
Purchase of machinery

31/12/2016
Depreciation (P/L) 500 000.00 0.5
Machinery: Accumulated depreciation and impairment losses (SFP) 500 000.00 0.5
(5 000 000 / 5 X 6/12) 1.0
Depreciation for the period

Notes for 31/12/2016

Impairment?
Carrying amount = 4 500 000
Recoverable amount = 4 600 000

Carrying amount does not exceed RA, thus no impairment needed.

 Debit Credit
Journal entries - 31/12/2017
Depreciation (P/L) 1 000 000.00 0.5
Machinery: Accumulated depreciation and impairment losses (SFP) 1 000 000.00 0.5
(5 000 000 / 5) 1.0
Depreciation for the period

Carrying amount = 3 500 000

(5 000 000 – 500 000 – 1 000 000)
Recoverable amount = 3 200 000

Carrying amount exceeds RA, thus impairment is needed.

Impairment loss (P/L) 300 000.00 0.5
Machinery: Accumulated depreciation and impairment losses (SFP) 300 000.00 0.5
(3 500 000 – 3 200 000) 1.0
Impairment of asset to recoverable amount

Deferred tax asset (SFP) 84 000.00 0.5

Taxation expense (P/L) 84 000.00 0.5
Deferred tax on temporary difference
Journal entries - 31/12/2018 Debit Credit
Depreciation (P/L) 914 285.71 0.5
Machinery: Accumulated depreciation and impairment losses (SFP) 914 285.71 0.5
3 200 000 / 3.5 = 914 285.71
(Revised CA / remaining useful live)
Depreciation for the period

Taxation expense (P/L) 24 000.00 0.5

Deferred tax asset (SFP) 24 000.00 0.5
Deferred tax on temporary difference

Deferred tax calculations:

Carrying amount Tax base Temporary Deferred tax A/(L)
difference
Cost price - 1 Jul 2016 5 000 000.00 5 000 000.00 - -
Depreciation/W&T -500 000.00 -500 000.00 - -
Balance - 31 Dec 2016 4 500 000.00 4 500 000.00 - - 1
Depreciation/W&T -1 000 000.00 -1 000 000.00 - -
Impairment loss -300 000.00 - (300 000.00) 84 000.00
Balance - 31 Dec 2017 3 200 000.00 3 500 000.00 (300 000.00) 84 000.00 2
Depreciation/W&T -914 285.71 -1 000 000.00 85 714.29 (24 000.00)
Balance - 31 Dec 2018 2 285 714.29 2 500 000.00 (214 285.71) 60 000.00 2

Dates & narrations : 1 Mark

Part B
Eco Teddy (Pty) Ltd
Notes to the financial statement for the financial reporting period ended
31 December 2018
1 mark: heading

20. Property, plant and equipment

R R
2018 2017
Carrying amount at the beginning of the year 3 200 000 4 500 000
Cost 5 000 000 0.5 5 000 000 0.5
Accumulated amortisation and impairment losses (1 800 000) 0.5 (500 000) 0.5
Depreciation (914 285.71) 0.5 (1 000 000) 0.5
Impairment - (300 000) 0.5
Carrying amount at the end of the year 2 285 714.29 3 200 000
Cost 5 000 000 0.5 5 000 000 0.5
Accumulated amortisation and impairment losses (2 714 285.71) 0.5 (1 800 000) 0.5

22. Deferred tax

The deferred tax asset/ (liability) comprises temporary differences relating to the following:
R R
2018 2017
Machinery 60 000 P 84 000 P
QUESTION 2
SOURCE: CACN030
TOTAL MARKS: 20 MARKS

Purchase price 6 325 000 0.5

VAT ( 6 325 000 X 15/115) -825 000.00 1.0
5 500 000.00
Discount (5 500 000 x 6%) -330 000.00 1.0
Transport 150 000.00 0.5
Installation cost 200 000.00 0.5
5 520 000.00
Journals
For the financial year ending 31 December 2011
Debit Credit
Depreciation (P/L) 0.5 621 000.00
Accumulated depreciation (SFP) 0.5 621 000.00
(R 5 520 000 0.5P – (R 5520 000 X 10%) 0.5 / 8 0.5 = R 621 000)

Impairment (P/L) 0.5 128 000.00

Accumulated depreciation (SFP) 0.5 128 000.00

Income tax (P/L) 0.5 99 400.00

Deferred tax liability (SFP) 0.5 99 400.00
(R 234 640 – R 135 240) P
For the financial year ending 31 December 2012
Depreciation (P/L) 0.5 599 667
Accumulated depreciation (SFP) 0.5 599 667
Deprecation 2012: (R 4 150 000 0.5 – (R 5 520 000 X 10%) 0.5 / 6 0.5 = R 599 667

Income tax (P/L) 0.5 141 218

Deferred tax (SFP) 0.5 141 218
(375 858 – 234 640) P

Temporary Deferred tax

Carrying value Tax base differences Asset / (Liability)
1 Jan 10 Purchase of asset 5 520 000.00 5 520 000.00
31 Dec 10 Depreciation/ Wear and tear -621 000.00 -1 104 000.00
31 Dec 10 Carrying value 4 899 000.00 4 416 000.00 483 000.00 (135 240) 2
31 Dec 11 Depreciation/ Wear and tear -621 000.00 -1 104 000.00
31 Dec 11 Impairment -128 000.00 -
31 Dec 11 Carrying value 4 150 000.00 3 312 000.00 838 000.00 (234 640) 2
31 Dec 12 Depreciation/ Wear and tear -599 667 -1 104 000.00
31 Dec 12 Carrying value 3 550 333 2 208 000.00 1 342 333 (375 853) 2

Movement for 2011: 234 640 – 135 240 = R 99 400

Movement for 2012: 375 853 – 234 640 = R 141 213
QUESTION 3
SOURCE: CACN030 TEST 3 (ADJUSTED)
TOTAL MARKS: 16.5 MARKS

Part A
Give-a-lot (Pty) Ltd
Notes to the financial statement for the financial year ended 31 December 2020
Communication skill
Heading (1) Currency (1)

1. Property, plant and equipment

R
2020

Property
Net carrying amount 8 500 000 W2
Gross carrying amount 10 000 000 0.5P
Accumulated depreciation and impairment losses (1 500 000) 0.5P W3

Transfer to Investment property 4 250 000 0.5P

Gross carrying amount (5 000 000) W4
Accumulated depreciation and impairment losses 750 000 W4

Depreciation (151 128) 0.5P W5

Impairment loss

Transfer to IFRS 5
Gross carrying amount 0
Accumulated depreciation and impairment losses 0

Net carrying amount 4 098 872 0.5P

Gross carrying amount 5 000 000 W6
Accumulated depreciation and impairment losses (901 128)
W1: Carrying amount on 31 December 2019:
Cost price: R 11 500 000 X 100 / 115 (1) = R 10 000 000
Total useful life (in months): 25 X 12 = 300
Remaining useful life: 300 – 10 – 12 – 12 = 266
Residual value: R 2 500 000
Depreciable amount: R 10 000 000 – R 2 500 000 = R 7 500 000
Carrying amount = R 7 500 000 (0.5) / 300 (0.5) X 266 (0.5)
= R 6 650 000 + R 2 500 000 (0.5)
= R 9 150 000

W2: Testing for impairment on 31 December 2019

Recoverable amount is the greater of value in use and fair value less cost to sell (1)
Value in use: R 8 500 000
Fair value less cost to sell : R 8 000 000

Thus recoverable amount is R 8 500 000

Carrying amount is R 9 150 000 (W1)

Carrying amount exceeds recoverable amount and we need to impair:

Recoverable amount becomes carrying amount on 31 December 2019.

W3: Accumulated depreciation and impairment losses

Cost – recoverable amount: R 10 000 000 – R 8 500 000 = R 1 500 000 (0.5)

W4: Transfer to investment property

Cost of 50% of property
= R 10 000 000 X 50% (0.5) = R 5 000 000

Accumulated depreciation and impairment losses of 50% of property

= R 1 500 000 (0.5P) X 50% (0.5) = R 750 000

W5: Depreciation for the 2020 financial year

CA at 31/12/2019 = R 8 500 000 (0.5P) X 50% (0.5) = R 4 250 000
Revised residual value = R 1 800 000 (0.5) X 50% (0.5) = R 900 000
Revised depreciable amount = R 4 250 000 (0.5P) - R 900 000 (0.5P) = R 3 350 000
Remaining useful life = 266

Thus depreciation: R 3 350 000 / 266 (0.5P) X 12 (0.5) = R 151 128

W6: Property as at 31/12/2020

Gross carrying amount: 10 000 000 (0.5) – 5 000 000(0.5) = 5 000 000
Accumulated depreciation and impairment: 750 000 (W4) (0.5P) + 151 128 (0.5)
QUESTION 4
SOURCE: UCT refresher course
TOTAL MARKS: 16 MARKS

The recoverable amount is R170 000, being the greater of the net selling price and value in use of the asset.

2002 Debit Credit

Impairment loss - P/L (200 - 170) 30 000 (1)
Machine B – SFP 30 000 (1)
Recognition of impairment loss

Deferred tax - SFP (30 000 x 30%) 9 000 (1)

Deferred tax - P/L (30 000 x 30%) 9 000 (1)
Recognition of deferred tax where temporary diff. arose

2003
Depreciation (SOPL) (170 ÷ 4) 42 500 (1)
Accumulated depreciation on machinery (SFP) 42 500 (1)
Recognition of depreciation for current year

Deferred tax - SPL ((50 000 - 42 500) x 30%) 2 250 (1)

Deferred tax – SFP 2 250 (1)
Current year deferred tax charge
 Debit Credit
Machine B – SFP (N1) 22 500 (1)
Other income (P/L) 22 500 (2)
Recognise reversal of impairment loss

Deferred tax - P/L 6 750 (1)

Deferred tax - SFP (22 500 x 30%) 6 750
Deferred tax recognised for temporary diff. resulting from reversal of impairment loss

Deferred tax journals above, could have also been combined – refer to SFP approach calc
Deferred tax - SPL 9 000
Deferred tax – SFP 9 000
Current year deferred tax charge
Notes:
Historical Recoverable
Carrying amount
amount (Impairments)
31 Dec 2002 (before impairment) 200 000
Impairment (280 000 – 170 000) (1) - (30 00)
1 Jan 2003 200 000 170 000 (1)
Depreciation (50 000) (42 500)
Historical: (200 000 / 4)
Actual: (170 000 / 4)
31 Dec 2003 150 000 127 500
Impairment reversal = 220 000 - 127 500 22 500
= 32 500 but limited to 22 500 (150 000 - 127 500) (2)
210 000

Balance sheet approach for 2003:

CA TB TD DT Asset / (Liability)
31/12/2002 170 000 150 000 20 000 (6 000)
Dep/ W&T (42 500) (50 000) 7 500 (2 250)
Reversal of impairment 22 500 0 22 500 (6 750)
31/12/2003 150 000 100 000 50 000 (15 000)

Movement for the year: 15 000 – 6 000 = 9 000

QUESTION 5
SOURCE: BIG PHARMA LIMITED
TOTAL MARKS: 16 MARKS

CALCULATIONS FOR CA of CGU:

W1 Computer equipment = (5 200 000 – 200 000) (0.5) /5 (0.5) x 2.5 (0.5) 2 700 000
= 2 500 000 + 200 000 (0.5)

W2 Inventory: R
Carrying value of inventory: As per part A 6 693 948 (0.5P)
Net realisable value 6 500 000 (0.5)

Cost price of inventory 270 000 x 22.31 6 023 700 (1P)

Net realisable value 6 000 000 (0.5)

W3 Accounts payable:
Accounts payable at 30 April 2022: Amort P1=3, P2=3 (1) (1 163 820)

Interest for 31 May 2022 1 163 820 x 3% (0.5) x ¼ (0.5) (8 729)

Accounts payable at 31 May 2022: 1 172 549 (0.5P)

W4 Buildings: R 6 600 000 (0.5) – R 1 200 000 (0.5) R 4 755 000

 = R 5 400 000 / 240 (0.5) (20X12) (0.5) 158 X (240 – 12 – 12 – 12 – 12 –
12 – 12 – 11)
= R 3 555 000 + R 1 200 000 (0.5)
This was due to two dates given in ALTERNATIVE:
scenario! = R 5 400 000 / 240 (0.5) (20X12) (0.5) 157 X (240 – 11 – 12 – 12 – 12 –
12 – 12 – 11)
= R 3 532 500 + R 1 200 000 (0.5)
= R 4 732 500

CGU CA 30 APRIL 2022:

Carrying amount Impairment Allocation of fair value less

30 April 2022 costs to sell 30 April 2022

Goodwill 1 000 000 (1 000 000) 0

Computer equipment 2 700 000 W1 (1 036 180) W7 1 663 820 (0.5)
Inventory 6 500 000 W2 Scoped out 6 500 000 (0.5)
Trade payable (1 163 820) W3 Scoped out (1 163 820) (0.5)
Building 4 755 000 W4 (755 000) W6 4 000 000 (0.5)
13 791 180 2 791 180 11 000 000

Calculations for allocation of impairment:

W5
Impairment = 13 791 180 – 11 000 000 = 2 791 180 (1)

First impair goodwill to R0, thus remaining impairment to be provided for: 2 791 180 – 1 000 000 = 1 791 180 (1)
W6
Building:
FV – CTS of individual asset is R 4 000 000 hence we need to consider IAS 36.105.
Impairment on buildings is limited to R 4 755 000 – R 4 000 000 = R 755 000 (1)
The excess impairment will be re-allocated to computers.

W7
Computer equipment:
R 2 791 180 (0.5) – R 1 000 000 (0.5) – R 755 000 (0.5)
= R1 036 180
No specific FV – CTS was provided, hence no adjustment needed

AVAILABLE MARKS 16.5

MAXIMUM MARKS 16