Jackson Ltd $($Jackson$)$ acquired $100\%$ of the ordinary share capital of James Ltd $($James$)$ for shs $10,000,000$ on $1$st January $2011.$ This figure included shs $960,000$ for goodwill.

Jackson is preparing group accounts for the year to $31$st December $2015$ and due to a decline in market conditions has decided to carry out an impairment review of the fixed assets and goodwill of James.

James operates in two distinct business areas which are largely independent $$ one is services to the oil industry and the other is the operation of a rail franchise.

The following assets have been attributed to these activities as follows:

Oil services Rail franchise

Fixed assets:

Tangible $10,000,0006,900,000$

Intangible $-1,200,000$

$10,000,0008,100,000$

All fixed assets are held at depreciated cost.

The following items have still to be allocated:

a$)$ Head office property with a net book value of shs $3,200,000.$ It is estimated that this can be split $60$:$40$ between oil and rail.

b$)$ Goodwill$$it is estimated that $75\%$ of this relates to the rail franchise and the remainder to oil.

The directors estimate that the rail franchise has a NFV of shs $7,500,000$ and oil services a NFV of shs $9,600,000.$

The intangible asset in the rail franchise relates to the NBV of the operating license associated with the franchise.

The following pre$-$tax cash flows have been estimated for each CGU:

Year Oil services Rail franchise

$20163,000,0004,200,000$

$20172,800,0003,400,000$

$20182,800,0003,400,000*$

$20194,800,000*$

$*$the rail franchise expires at the end of $2018$ and the oil services division will be wound up in $2019.$

The pre$-$tax market rate of return for oil services is estimated at $15\%$ and $20\%$ for the rail franchise.

  

 

Required:

i$.$ Calculate the total net assets for each CGU.

ii$.$ Calculate the value in use for each CGU.

iii. Calculate the impairment $($if any$)$ for each CGU.

iv$.$ Shows the accounting entries.

Answer rating: 100% (QA)

Lets break down the calculations step by step i Calculate the total net assets for each CGU Cash Generating Unit Oil services Tangible fixed assets 10... View the full answer