ACC204 Advanced Financial Accounting - Free Samples to Students

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

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

 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

1. b) Journal Entries

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].