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1. As explained within the Chapter 8, intangible asset, Australian accounting standards now prohibit goodwill from being subject to amortisation. Rather, there is a requirement that goodwill be subject to impairment testing. In relation to impairment testing of goodwill, Petersen and Plenborg (2010, p.420) state:

Many argue that an impairment test only approach seems a logical step in the development of accounting for goodwill. First, the underlying logic for removing the traditional amortization methodology is that the amortization on a straight-line basis over a number of years contains no information value for those using financial statements (Jennings et al., 2001). Moreover, IFRS 3 (IASB, 2004b) no longer requires that companies perform the almost impossible task of estimating the useful life of goodwill (Jansson et al. 2004). Second, the impairment approach should provide users of financial statements with better information, as goodwill is not automatically amortized (Colquitt and Wilson, 2002; Bens and Heltzer, 2005). Finally, goodwill impairment tests would be operational and capture a decline in the value of goodwill (Donnelly and Keys, 2002).
You are to provide a clear argument as to why you agree or disagree with the perspectives provided in the paragraph above.  

Background on Goodwill Accounting

Solution 1

The IFRS 3 requires that the items of financial statements like, assets, liabilities, incomes and expenses should be recognized at their fair value during the acquisition or business combination. Thus, as per IAS 36 and IFRS 3, the goodwill should be tested for impairment yearly and should be recorded at fair value.

Earlier, there were broadly two method for recognizing goodwill, one is amortization and other is impairment. Under amortization, the goodwill is amortized or charged off to the P&L on the basis of its useful life. We agree with the contention that estimating useful life is a difficult task which many a times leads to incorrect results, further it is also true that under this method the goodwill is amortized on a straight line basis. So, this method does not reflects the fair value of goodwill, hence the true and fair value concept fails (Ifrsbox.com, 2018).

The other method requires, the goodwill to be reviewed periodically for any indicators of impairment. If impairment exists, then the goodwill is impaired by the amount of impaired value. The Impairment arises when the recoverable amount falls below the carrying amount. Thus, this method helps in reflecting the fair value of the goodwill and is thus a more reliable method. Further, it also reflects the true picture of financial statements, and helps the users of the financial statement to make correct decisions. Although, this method is more typical and complex as compared to the first method, but it leads to more accurate results as compared to amortization method (Iasplus.com, 2018).

Solution 2

Coupon Rate per annum (given) = 6%

Coupon Rate half yearly (given) = 6% / 2

= 3%

Rate of return in Market per annum (given) = 4%

Rate of return in Market half yearly (given) = 4% / 2

= 2%

Face value of Debentures = $1,000,000

Interest payments (half yearly) = 1,000,000 x 3%

= $30,000

Period (in years) =  6

Number of interest payments =  6 x 2

=  12

Issue price of Debentures

= Present value of Interest payments + Present value of debentures face value

= (30,000 / 2%) (1 - (1+2%)^(-12))  +  1,000,000 / ((1+2%)^12)

= (1,500,000) (1 - (1.02)^(-12))  +  1,000,000 / ((1.02)^12)

= (1,500,000) (1 - 0.788493)  +  1,000,000 / 1.268242

= (1,500,000) (0.211507)  +  1,000,000 / 1.268242

= $1,105,754

Journal Entries

 

Date

Particulars

 Dr./ Cr.

 Amount ($)

 Amount ($)

1st Jul-15

Cash

Dr.

  1,105,754

To Debentures

Cr.

    1,105,754

31st Dec-15

Interest Expense (Note 1)

Dr.

        22,115

Debentures

Dr.

          7,885

To Cash (Note 1)

Cr.

          30,000

30th Jun-16

Interest Expense (Note 2)

Dr.

        21,957

Debentures

Dr.

          8,043

To Cash (Note 2)

Cr.

          30,000

Note 1

Interest expense (1st payment) = 1,105,754 x 2%

=  22,115

Semi Annual interest payment = 1,000,000 x 3%

=  30,000

Note 2

Interest expense (2nd payment) = (1,105,754 - 7,885) x 2%

=  21,957

Solution 3 

Particulars

2015 ($m)

2016 ($m)

2017 ($m)

Total Contract Price

50

50

50

Less:

Cost for the year

10

28

40

Estimated costs to complete

28

12

0

Estimated total cost

38

40

40

Estimated Gross Profit

12

10

10

Percentage of completion

26.32%

70.00%

100.00%

Particulars

2015

2016

2017

Estimated Gross Profit

          12,000,000

          10,000,000

          10,000,000

Percentage of completion

26.32%

70.00%

100.00%

Gross Profit Recognised for the year

            3,158,400

            3,841,600

            3,000,000

Particulars

2015 ($m)

2016 ($m)

2017 ($m)

Cash collected

11

19

20

Journal entries for the 2015 financial year using the percentage-of-completion method

Particulars

 Dr./ Cr.

 Amount ($)

 Amount ($)

Construction in progress A/c

Dr.

          10,000,000

To Expenses A/c

Cr.

          10,000,000

(Contract cost recognised)

Construction in progress A/c

Dr.

            3,158,400

Construction expenses A/c

Dr.

          10,000,000

To Income from Contract A/c

Cr.

          13,158,400

(Revenue & Profit recognised)

Accounts receivable A/c

Dr.

          12,000,000

To Construction in progress A/c

Cr.

          12,000,000

(Amount receivable from client)

Cash A/c

Dr.

          11,000,000

To Accounts receivable A/c

Cr.

          11,000,000

(Cash received from client)

 

Journal entries for the 2015 financial year, assuming the stage of completion cannot be reliably assessed

Particulars

 Dr./ Cr.

 Amount ($)

 Amount ($)

Construction in progress A/c

Dr.

          10,000,000

To Expenses A/c

Cr.

          10,000,000

(Contract cost recognised)

Construction expenses A/c

Dr.

          10,000,000

To Income from Contract A/c

Cr.

          10,000,000

(Revenue from contract recognised)

Accounts receivable A/c

Dr.

          12,000,000

To Construction in progress A/c

Cr.

          12,000,000

(Amount receivable from client)

Cash A/c

Dr.

          11,000,000

To Accounts receivable A/c

Cr.

          11,000,000

(Cash received from client)

Construction in progress A/c

Dr.

            2,000,000

To Contract Liability A/c

Cr.

            2,000,000

(Difference of revenue over cost recognised as liability)

 

 Solution 4 

  1. a) Revaluation of assets

For the revaluation of assets, carrying values of the assets needs to be adjusted to fair value. It means carrying value will be increased or decreased to match its fair value.

Revaluation Surplus  = Fair value - Carrying amount

Revaluation Loss  = Carrying amount - Fair value

Investments in companies

 Carrying Value ($)

 Current fair value ($)

 Revaluation Surplus

 Revaluation Loss

 Property, plant and equipment

 Factory (NSW)

 Land

        100,000

         150,000

          50,000

                     -   

 Buildings

 – Cost

          70,000

           80,000

          30,000

                     -   

 – Accumulated depreciation

-         20,000

                    -   

Factory (Qld)

 Land

        150,000

         120,000

                   -   

            30,000

 Buildings

 – Cost

        125,000

           70,000

            10,000

 – Accumulated depreciation

-         45,000

                    -   

 
  1. b) Journal Entries

Particulars

 Dr./ Cr.

 Amount ($)

 Amount ($)

Accumulated Depreciation - Building (factory NSW)

 Dr.

           20,000

To Building - Cost (factory NSW)

 Cr.

          20,000

(Accumulated depreciation transferred to building)

Land - Cost (factory NSW)

 Dr.

           50,000

Building - Cost (factory NSW)

 Dr.

           30,000

To Revaluation Surplus A/c

 Cr.

          80,000

(Revaluation surplus recorded)

Accumulated Depreciation - Building (factory QLD)

 Dr.

           45,000

To Building - Cost  (factory QLD)

 Cr.

          45,000

(Accumulated depreciation transferred to building)

Revaluation Surplus A/c

 Dr.

           40,000

To Land - Cost (factory QLD)

 Cr.

          30,000

To Building - Cost (factory QLD)

 Cr.

          10,000

(Revaluation loss recorded and adjusted in surplus)

 

References:

Iasplus.com. (2018). IAS 36 — Impairment of Assets. [online] Available at: https://www.iasplus.com/en/standards/ias/ias36 [Accessed 24 Aug. 2018].

Ifrsbox.com. (2018). How to Test Goodwill for Impairment – IFRSbox – Making IFRS Easy. [online] Available at: https://www.ifrsbox.com/impairment-goodwill-ifrs-testing/ [Accessed 24 Aug. 2018].

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My Assignment Help. (2021). Essay: Impairment Test Vs Amortization For Goodwill Accounting And Recognizing Gross Profit.. Retrieved from https://myassignmenthelp.com/free-samples/acc204-advanced-financial-accounting/financial-statements.html.

"Essay: Impairment Test Vs Amortization For Goodwill Accounting And Recognizing Gross Profit.." My Assignment Help, 2021, https://myassignmenthelp.com/free-samples/acc204-advanced-financial-accounting/financial-statements.html.

My Assignment Help (2021) Essay: Impairment Test Vs Amortization For Goodwill Accounting And Recognizing Gross Profit. [Online]. Available from: https://myassignmenthelp.com/free-samples/acc204-advanced-financial-accounting/financial-statements.html
[Accessed 19 July 2024].

My Assignment Help. 'Essay: Impairment Test Vs Amortization For Goodwill Accounting And Recognizing Gross Profit.' (My Assignment Help, 2021) <https://myassignmenthelp.com/free-samples/acc204-advanced-financial-accounting/financial-statements.html> accessed 19 July 2024.

My Assignment Help. Essay: Impairment Test Vs Amortization For Goodwill Accounting And Recognizing Gross Profit. [Internet]. My Assignment Help. 2021 [cited 19 July 2024]. Available from: https://myassignmenthelp.com/free-samples/acc204-advanced-financial-accounting/financial-statements.html.

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