On 1 January 2020 Company A acquired a 70% controlling interest the ordinary share capital of Company B. Machinery that was purchased for R4 000 000, with a carrying amount of R3 700 000, was considered to be undervalued by R600 000. The machine has a remaining using life of 5 years and carries no residual value. The summer rain in the Limpopo region resulted in multiple flash floods on Company B’s premises. The machine that was undervalued on the date Company A acquired its interest in Company B has been severely affected by these flash floods. Subsequently, there has been a significant reduction in production capacity of this machine and this is due to the constant breakdowns and repairs that have been required since the floods . On 30 September 2020, a mechanical specialist has assessed the condition of the machine and has determined the value in use of this machine as R2 400 000, however this machine has a fair value of R2 000 000 and the cost to sell is negligible. The group accountant is uncertain about the pro-forma journal entry that needs to be processed in response to the mechanical specialist’s assessment. The following journal entry was processes by the group accountant: Dr: Impairment loss (SP&L) 1 255 000 Cr: Accumulated Impairments (SFP) 1 255 000 Accounting for the impairment of the machine REQUIRED: Review the pro-forma entry processed by the Group Accountant as it relates to the impairment of the machine in Company B. Discuss the error made by the group accountant; explain what the correct group accounting treatment should be in respect of the impairment; and propose an appropriate, correcting journal entry
On 1 January 2020 Company A acquired a 70% controlling interest the ordinary share capital of Company B.
Machinery that was purchased for R4 000 000, with a carrying amount of R3 700 000, was considered to be undervalued by
R600 000. The machine has a remaining using life of 5 years and carries no residual value.
The summer rain in the Limpopo region resulted in multiple flash floods on Company B’s premises. The machine that was
undervalued on the date Company A acquired its interest in Company B has been severely affected by these flash floods.
Subsequently, there has been a significant reduction in production capacity of this machine and this is due to the constant
breakdowns and repairs that have been required since the floods
.
On 30 September 2020, a mechanical specialist has assessed the condition of the machine and has determined the value in
use of this machine as R2 400 000, however this machine has a fair value of R2 000 000 and the cost to sell is negligible.
The group accountant is uncertain about the pro-forma
specialist’s assessment. The following journal entry was processes by the group accountant:
Dr: Impairment loss (SP&L) 1 255 000
Cr: Accumulated Impairments (SFP) 1 255 000
Accounting for the impairment of the machine
REQUIRED:
Review the pro-forma entry processed by the Group Accountant as it relates to the impairment of the machine in Company B.
Discuss the error made by the group accountant; explain what the correct group accounting treatment should be in respect of
the impairment; and propose an appropriate, correcting journal entry
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
