Brown & Son Ltd. took over an existing hotel as a going concen for $18 million o

Question

Brown & Son Ltd. took over an existing hotel as a going concen for $18 million on 1 January 2016. The table below shows the fair value of hotel's net assets on the acquisition date and the carrying amount of the net assets at the end of financial year Land and building Equipment Cash Vehicles Account receivables Account payables Fair value 1 January 2016 $ milliorn 11.0 2.7 arrying amount 31 December 2016 $ million 13.0 2.4 3.5 0.2 (2.2) 17.5 18.4 Note: The revenue of Brown & Son Ltd.'s hotel was seriously affected by a rival hotel 50 meters away from it. The rival hotel was opened in June 2016. The value in use of Brown & Son Ltd.'s hotel was $16 million on 31 December 2016 The owner of rival hotel has offered to purchase Brown & Son Ltd.'s hotel (including all the net assets in above) for $18 million An independent valuer said the fair value of the land and building should be $12 million A vehicle had an accident on 31 December 2016, which cannot be repaired after the accident. The insurance company said that it is an uninsured motorist clause, which the loss cannot be covered. This vehicle has a carrying amount, which is included in the carrying amount of vehicles in the above table One of the corporate clients of Brown & Son Ltd.'s hotel went bankrupt on 31 December 2016. It owes Brown & Son Ltd.'s hotel $120,000. Brown & Son Ltd.'s hotel estimated it only receive 50% of the amount (a) Calculate the goodwill of Brown & Son Ltd.'s hotel on 1 January 2016 (b) Prepare the journal entry required to record the impairment loss in Brown & Son Ltd.'s hotel's accounts at 31 December 2016

Explanation / Answer

Goodwill as on 01 January 2016

Consideration Paid    $18 Million

Less:- Fair Value of assets acquired -$17.5 Million

Goodwill $0.5 Million

As per IAS 36, Impairment of Assets says, entity's assets are not carried at more than their recoverable value (i.e. higher of fair value less cost of disposal and value in use). In above case carried value of Assets in $18.9 Million (18.4 +0.5 Goodwill) and recoverable value is $18 Million (higher of $18 Million fair value of business or $16 Million - value in use), since the carried value is more than fair value it require impairment.

Journal Entry

Impairment loss A/c Dr.    $1.1

To Land and Building    $1.0

To Vehicle $0.04   

To Account Receivable $0.06    (50% of $120,000)

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