Fresh Ltd has two retail businesses that represent separate cash generating units, Fresh Juice Bar and Fresh
Question:
Fresh Ltd has two retail businesses that represent separate cash generating units, ‘Fresh Juice Bar’ and ‘Fresh Salads’. At 30 June 2019, the carrying amounts of the assets of the units, valued pursuant to the cost model, are as follows:
Fresh Juice Bar
Fresh Salads
$
$
Cash
18,000
14,000
Inventory
4,000
3,000
Fixtures and fittings
50,000
65,000
Accumulated depreciation – fixtures and fittings
(45,000)
(15,000)
Equipment
65,000
90,000
Accumulated depreciation – equipment
(30,000)
(30,000)
Motor vehicles
25,000
26,000
Accumulated depreciation – motor vehicles
(13,000)
(8,000)
Goodwill
10,000
20,000
Total
84,000
165,000
The inventory is recorded at the lower of cost and net realisable value. The motor vehicles of ‘Fresh Juice Bar’ have a fair value less costs to sell of $11,000, and motor vehicles of ‘Fresh Salads’ have a fair value less costs to sell of $14,000.
On 30 June 2019, the directors of Fresh Ltd estimate that the fair value less cost to sell for ‘Fresh Juice Bar’ and ‘Fresh Salads’ amount to $50,000 and $140,000 respectively. The value in use of ‘Fresh Juice Bar’ and ‘Fresh Salads’ are estimated at $58,000 and $180,000 respectively.
Required:
Prepare a letter to the directors of Fresh Ltd, explaining how to calculate impairment losses for cash generating units, and how impairment losses are to be allocated between assets of the cash generating unit. Provide references to key paragraphs in AASB 136 to support your discussion.
In your letter, calculate the impairment loss to be recognised by Fresh Ltd for each of its cash generating units as at 30 June 2019, and determine how the impairment loss is to be allocated. Provide explanations throughout your calculations and workings, so that the directors understand how you are applying the requirements of AASB 136. Prepare the journal entries to recognise any impairment losses.
As you complete the letter, you also need to explain whether it is possible to reverse impairment losses in future periods. The directors believe that the fair value of both businesses is going to increase significantly in the next two years, as the shopping mall that the two outlets are in is expanding, which will attract a lot more business in the long run. Can any/all of the impairment losses recognised on 30 June 2019 be reversed in the future? Explain, with reference to key paragraphs in AASB 136.
Expert Answer:
Your Name Your Position Your Address City State Zip Code Date Directors Name Fresh Ltd Company Address City State Zip Code Dear Directors Name Subject Calculation and Allocation of Impairment Losses f... View the full answer
