Tutorial Solutions Week 13 - ACCY200 FINANCIAL ACCOUNTING...

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ACCY200 FINANCIAL ACCOUNTING IIA SPRING 2009 WEEK 13 TUTORIAL SOLUTIONS: LEO Chapter 9 Review Questions 2, 8; Case Studies 1, 9; Practice question 9.2, 9.5, 9.7, 9.10. REVIEW QUESTIONS 2. Why is an impairment test considered necessary? An entity’s balance sheet may overstate the assets, either because the assets’ fair values are lower than the carrying amounts, or because the accountant’s estimates are wrong eg the calculation of depreciation requires estimates of residual value, useful life, pattern of benefits. 8. What are the limits to which an asset can be written down in relation to impairment losses? An asset must be reduced to its recoverable amount.
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Case study 1 1. Define a CGU A cash-generating unit is the smallest identifiable group of assets that generates cash flows that are largely independent of the cash inflows from other assets or groups of assets. 2. Explain why impairment testing requires the use of CGUs The impairment test requires a comparison of the recoverable amount of an asset with the higher of the asset’s value in use and fair value less costs to sell. Value in use requires: - an estimate of the future cash flows the entity expects to derive from the asset - expectations about variety in timing of cash flows - the price for bearing the uncertainty inherent in the asset These cash flows are based upon data such as financial budgets and forecasts. For some assets, there are no cash flows that are generated independently from those of other assets e.g. the milking machines or the machines used to separate cream from milk etc do not generate independent cash flows. The eventual cash flows come from the sale of the milk products. These machines could be sold separately, giving a fair value less costs to sell. However, as management have decided to use the machines rather than sell them, management have made the decision that the value in use is greater than the value via sale. (iii) Explain the factors used in selecting a CGUs for an entity Cash flows must be independent of other cash flows A CGU must be the lowest aggregation of assets independently generating cash flows. Factors include (see paras 69-71 of AASB 136): - how management monitors the entity’s operations: such as product lines, businesses, individual locations, districts or regional areas. How does management break down Fresh Milk Ltd – by factory? By dairy district? By product? - how management makes decisions about continuing or disposing of the entity’s assets and operations. If management wanted to sell off part of the business but still keep a viable business remaining, how could the business be broken down into parts that could be sold off? -
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This note was uploaded on 12/13/2010 for the course ACCY 201 taught by Professor Kevin during the Three '09 term at University of Wollongong, Australia.

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Tutorial Solutions Week 13 - ACCY200 FINANCIAL ACCOUNTING...

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