At 30 June 2009, Reacher Ltd reported the following assets: $ Land 50,000 Plant

Question

At 30 June 2009, Reacher Ltd reported the following assets:

$
Land 50,000
Plant 250,000
Accumulated depreciation (50,000)
Goodwill 8,000
Inventory 40,000
Cash 2,000
All assets are measured using the cost model.

At 30 June 2009, the recoverable amount of the entity, considered to be a single cash-generating unit, was $272,000.

For the period ending 30 June 2010, the depreciation charge on plant was $18,400. If the plant had not been impaired the charge would have been $25,000.

At 30 June 2010, the recoverable amount of the entity was calculated to be $13,000 greater than the carrying amount of the assets of the entity. As a result, Reacher Ltd recognised a reversal of the previous years impairment loss.

Required:

Prepare the journal entries relating to impairment at 30 June 2009 and 2010.

Explanation / Answer

Assuming that Community Bank and Prospect use the effective-interest method to amortize discounts, Illustration G-4 (page 1110) shows the amortization of the discount and the increase in the carrying amount of the note over the life of the note. 1110 Appendix G Accounting for Troubled Debt Community Bank Cash Interest Carrying Received Revenue Discount Amount of Date (0%) (10%) Amortized Note 12/31/08 $310,460 12/31/09 $0 $ 31,046a $ 31,046 341,506b 12/31/10 0 34,151 34,151 375,657 12/31/11 0 37,566 37,566 413,223 12/31/12 0 41,322 41,322 454,545 12/31/13 0 45,455 45,455 500,000 Total $0 $189,540 $189,540 a$31,046 $310,460 .10 b$341,506 $310,460 $31,046 Unfortunately, during 2010 Prospect’s business deteriorated due to increased competition and a faltering regional economy. After reviewing all available evidence at December 31, 2010, Community Bank determines that Prospect will probably pay back only $300,000 of the principal at maturity. As a result, Community Bank declares the loan impaired. It now needs to record a loss. To determine the loss, Community Bank first computes the present value of the expected cash flows, discounted at the historical effective rate of interest (10%). This amount is $225,396. The time diagram in Illustration G-5 highlights the factors involved in this computation.

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