For the past two years, Sporty Bhd. has been experiencing declining sales for
its Sportswear Division. As at 31 December 2016, the management decided to
test whether the assets of the division are affected by the condition. The test
revealed the followings:
Division’s assets
RM 28.5 million
Accumulated depreciation
RM 2 million
Fair value of Division’s assets (net of cost to sell)
RM21 million
Present Value of total future cash inflows
RM28 million
Interest expense (at % of PV of total future cash inflows) 10%
Throughout 2017, the market seems to be recovering as sales increasing and
this condition is seen as permanent in the foreseeable future. Consequently,
as at 31 December 2017, the management decided that the impairment should
be reversed. Depreciation rate is set at 7% of Division’s assets.
Required:
1. Discuss the accounting treatment of an impaired asset as prescribed in
MFRS 136 Impairment of Assets. In doing so, you should give an example
of condition where impairment test is necessary and explain the need to
recognise impairment loss when it occurs and.
2. Show the relevant journal entries for the above as at 31 December 2016
and 31 December 2017. Show all workings. All figures should be rounded
to the nearest thousand.