Happy Travel Group (HTG) has a small hotel in Central which was acquired on 1 Ja
ID: 2577490 • Letter: H
Question
Happy Travel Group (HTG) has a small hotel in Central which was acquired on 1 January 2016 for $18 million. The fair value of the hotel’s net assets on the acquisition date and their carrying amount at the financial year end date are detailed in Table 1:
Fair value
1 January 2016
$million
Carrying amount
31 December 2016
$million
The following facts were discovered before an impairment review on 31 December 2016:
In June 2016, a rival hotel opened another ‘boutique’ hotel 50 meters away from HTG’s hotel. The revenue of HTG’s hotel was seriously affected and on 31 December 2016, the value-in-use of HTG’s hotel was $16 million.
The owner of the rival hotel has offered to buy HTG’s hotel (including all of the above net assets) for $18 million.
An independent surveyor stated the fair value of the land and building should be $12 million.
In Table 1, the carrying amount of the vehicles included a hotel vehicle which had an accident on 31 December 2016. This vehicle was beyond repair after the accident. The carrying amount of that vehicle was $40,000 and the insurance company indicated that it was used by an uninsured purpose and the loss is not covered by insurance.
A corporate client of HTG hotel owing $120,000 went into liquidation on 31 December 2016. HTG estimated that they will receive only 50% of the amount outstanding.
Required:
a Determine the amount of goodwill for HTG’s hotel on 1 January 2016. (2 marks)
b Prepare accounting journal entries to record the impairment loss of the HTG hotel on 31 December 2016. Show your workings. (15 marks)
c Explain why the impairment test of HTG’s hotel requires the use of a cash generating unit, rather than being based on individual assets. (8 marks)
Fair value
1 January 2016
$million
Carrying amount
31 December 2016
$million
Land and building 11.0 13.0 Equipment 2.7 2.4 Cash 4.2 3.5 Vehicles 0.3 0.2 Account receivables 1.0 1.5 Account payables (1.7) (2.2) 17.5 18.4Explanation / Answer
a The amount of goodwill for HTG’s hotel on 1 January 2016. Fair value Carrying amount 01-Jan-16 31-Dec-16 $million $million Land and building 11.00 13.00 Equipment 2.70 2.40 Cash 4.20 3.50 Vehicles 0.30 0.20 Account receivables 1.00 1.50 Account payables -1.70 -2.20 Carrying value 17.50 18.40 Purchase price 18.00 Goodwill 0.50 0.50 18.90 Carrying value of net assets 16.00 Value in use 2.90 Loss b Accounting journal entries to record the impairment of assets 31 December 2016 31-Dec-16 Debit Credit Land and building 13.00 Equipment 2.40 Cash 3.50 Vehicles 0.20 Account receivables 1.50 Account payables 2.20 Goodwill 0.50 21.10 2.20 Net Assets 18.90 Value in use 16.00 Loss 2.90 31-Dec-16 Net Assets (Value in use) 16.00 Loss of value in use 2.90 Sundry Net Assets 18.90 (Recording the loss in net assets) c Explanation of why the impairment test of HTG's hotel requires the use of a cash generating unit Difference between carrying values and fair values Land and Building 1.00 Vehicles 0.16 less uninsured vehicle Accounts Receivable 0.06 Total 1.22 Value of net assets 14.78 It is impossible to assign values to individual assets and liabilities. Therefore, a net assets approach is indispensable.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.