Question

Hooper Retailing Ltd (Hooper) operates a high fashion store in the Sydney CBD. Unfortunately, trading conditions have been difficult as customers are increasingly shopping online and Hooper has experienced increasingly poor performance (i.e., there are indicators of impairment).

Below is Hooper’s balance sheet as at 30 June 2018.

Liabilites		Assets
Bank Overdraft	300,000	Cash	10,000
Accounts Payable	500,000	Accounts Receivable	200,000
		Inventory	700,000
Equity	510,000	Property Plant and Equipment - Net	300,000
		Goodwill	100,000
	1,310,000		1,310,000

Additional information

• Hooper is a single cash generating unit.
• Hooper has received an offer to purchase the company (all assets and liabilities) from Pocock Limited for $310,000 immediately before 30 June 2018.
• The accounts receivable relate to longstanding customers and it is expected that $195,000 will be recoverable. The inventory has a net realisable value of $650,000.

Required

1. Prepare Journal entries to recognise the asset impairment required on 30 June 2018.

answer:

Required 1

Impairment - Inventory	50,000
Accum Impairment - Inventory		50,000
Impairment – Acc Rec	5,000
Accum Impairment – Acc Rec		5,000

Accum Impairment - PPE	145,000
Goodwill		100,000
Accum Impairment - PPE		45,000

Below is Hooper’s balance sheet as at 30 June 2019.

Liabilites		Assets
Bank Overdraft	300,000	Cash	10,000
Accounts Payable	500,000	Accounts Receivable	180,000
		Inventory	720,000
Equity	360,000	Property Plant and Equipment - Net	250,000
		Goodwill	-
	1,160,000		1,160,000

Additional information at 30 June 2019

• Hooper did not accept the original offer from Pocock Ltd.  However, in June 2019 (i.e., a year later) a revised offer was received from Pocock Ltd for $500,000. All the inventory held at 30 June 2018 has been sold.
• Payment from all the accounts receivable at 30 June 2018 have been received.
• Depreciation on property plant and equipment was $25,000. If the impairment had not occurred the depreciation would have been $30,000 in 2018/9.

Required

2. Prepare journal entries to recognise any reversal of impairment on 30 June 2019.

Hi tutor, I have got the correct answer below: could you tell that how$40000 comes from? thanks

Goodwill	0
A/R	0
Accum Impairment -Inventory	0
Accum Impairment - PPE	40,000
Impairment Expense		40,000

Answer 1

Following guidance is available for reversal of impairment loss :

The increased carrying amount of an asset due to a reversal of an impairment loss should not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior accounting periods

As on 30th June 2019 It is provided that if there was no impairment the depreciation value is increasing by 5,000 (30,000 -25,000). in other words the carrying value of asset is reduced by 5,000 & hence the maximum reversal of impairment would be 40,000 (45,000-5,000)