Happy Travel Group (HTG) has a small hotel in Central which was acquired on 1 January 2016 for $18 million. The fair value of the hotelâs net assets on the acquisition date and their carrying amount at the financial year end date are detailed in Table 1:
Fair value
1 January 2016
$million
Carrying amount
31 December 2016
$million
Land and building 11.0 13.0 Equipment 2.7 2.4 Cash 4.2 3.5 Vehicles 0.3 0.2 Account receivables 1.0 1.5 Account payables (1.7) (2.2) 17.5 18.4
The following facts were discovered before an impairment review on 31 December 2016:
In June 2016, a rival hotel opened another âboutiqueâ hotel 50 meters away from HTGâs hotel. The revenue of HTGâs hotel was seriously affected and on 31 December 2016, the value-in-use of HTGâs hotel was $16 million.
The owner of the rival hotel has offered to buy HTGâs hotel (including all of the above net assets) for $18 million.
An independent surveyor stated the fair value of the land and building should be $12 million.
In Table 1, the carrying amount of the vehicles included a hotel vehicle which had an accident on 31 December 2016. This vehicle was beyond repair after the accident. The carrying amount of that vehicle was $40,000 and the insurance company indicated that it was used by an uninsured purpose and the loss is not covered by insurance.
A corporate client of HTG hotel owing $120,000 went into liquidation on 31 December 2016. HTG estimated that they will receive only 50% of the amount outstanding.
Required:
a Determine the amount of goodwill for HTGâs hotel on 1 January 2016. (2 marks)
b Prepare accounting journal entries to record the impairment loss of the HTG hotel on 31 December 2016. Show your workings. (15 marks)
c Explain why the impairment test of HTGâs hotel requires the use of a cash generating unit, rather than being based on individual assets. (8 marks)
Happy Travel Group (HTG) has a small hotel in Central which was acquired on 1 January 2016 for $18 million. The fair value of the hotelâs net assets on the acquisition date and their carrying amount at the financial year end date are detailed in Table 1:
| Fair value 1 January 2016 $million | Carrying amount 31 December 2016 $million | |
| Land and building | 11.0 | 13.0 |
| Equipment | 2.7 | 2.4 |
| Cash | 4.2 | 3.5 |
| Vehicles | 0.3 | 0.2 |
| Account receivables | 1.0 | 1.5 |
| Account payables | (1.7) | (2.2) |
| 17.5 | 18.4 |
The following facts were discovered before an impairment review on 31 December 2016:
In June 2016, a rival hotel opened another âboutiqueâ hotel 50 meters away from HTGâs hotel. The revenue of HTGâs hotel was seriously affected and on 31 December 2016, the value-in-use of HTGâs hotel was $16 million.
The owner of the rival hotel has offered to buy HTGâs hotel (including all of the above net assets) for $18 million.
An independent surveyor stated the fair value of the land and building should be $12 million.
In Table 1, the carrying amount of the vehicles included a hotel vehicle which had an accident on 31 December 2016. This vehicle was beyond repair after the accident. The carrying amount of that vehicle was $40,000 and the insurance company indicated that it was used by an uninsured purpose and the loss is not covered by insurance.
A corporate client of HTG hotel owing $120,000 went into liquidation on 31 December 2016. HTG estimated that they will receive only 50% of the amount outstanding.
Required:
a Determine the amount of goodwill for HTGâs hotel on 1 January 2016. (2 marks)
b Prepare accounting journal entries to record the impairment loss of the HTG hotel on 31 December 2016. Show your workings. (15 marks)
c Explain why the impairment test of HTGâs hotel requires the use of a cash generating unit, rather than being based on individual assets. (8 marks)
Related questions
At the start of the current year, SBC Corp. purchased 30% of SkyTech Inc. for $53 million. At the time of purchase, the carryingvalue of Sky Tech's net assets was $90 million. The fair value ofSky Tech's depreciable assets was $20 million in excess of theirbook value. For this year, Sky Tech reported a net income of $90million and declared and paid $20 million in dividends. |
The amount of purchased goodwill is: |
$20 million.
$33 million.
$73 million.
None of the above is correct.
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Universal Travel Inc. borrowed $500,000 on November 1, 2016, andsigned a 12-month note bearing interest at 6%. Interest is payablein full at maturity on October 31, 2017. In connection with thisnote, Universal Travel Inc. should report interest payable atDecember 31, 2016, in the amount of (Do not roundintermediate calculations. Round your final answer to the nearestwhole dollar amount): |
$5,000.
$20,000.
$25,000.
$30,000.
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Oklahoma Oil Corp. paid interest of $779,000 during 2016, andthe interest payable account decreased by $122,500. What wasinterest expense for the year? |
$656,500.
$779,000.
$901,500.
$534,000.
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Lake Co. receives nonrefundable advance payments with specialorders for containers constructed to customer specifications.Related information for 2016 is as follows ($ in millions): |
Customer advances balance, Dec. 31, 2015 | $118 |
Advances received with 2016 orders | 203 |
Advances applicable to orders shipped in 2016 | 181 |
Advances from orders canceled in 2016 | 43 |
What amount should Lake report as a current liability foradvances from customers in its Dec. 31, 2016, balance sheet? |
$97 million.
$0 million.
$321 million.
$140 million.
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On December 31, 2016, L Inc. had a $3,200,000 note payableoutstanding, due July 31, 2017. L borrowed the money to financeconstruction of a new plant. L planned to refinance the note byissuing long-term bonds. Because L temporarily had excess cash, itprepaid $670,000 of the note on January 23, 2017. In February 2017,L completed a $4,700,000 bond offering. L will use the bondoffering proceeds to repay the note payable at its maturity and topay construction costs during 2017. On March 13, 2017, L issued its2016 financial statements. What amount of the note payable should Linclude in the current liabilities section of its December 31,2016, balance sheet? |
$2,530,000.
$3,200,000.
$0.
$670,000.
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Branch Company, a building materials supplier, has $18,900,000of notes payable due April 12, 2017. At December 31, 2016, Branchsigned an agreement with First Bank to borrow up to $18,900,000 torefinance the notes on a long-term basis. The agreement specifiedthat borrowings would not exceed 75% of the value of the collateralthat Branch provided. At the date of issue of the December 31,2016, financial statements, the value of Branch's collateral was$19,100,000. On its December 31, 2016, balance sheet, Branch shouldclassify the notes as follows: |
$18,900,000 of long-term liabilities.
$18,900,000 of current liabilities.
$14,325,000 long-term and $4,575,000 current liabilities.
$4,725,000 long-term and $14,175,000current liabilities.
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At the beginning of 2016, Angel Corporation began offering a2-year warranty on its products. The warranty program was expectedto cost Angel 6% of net sales. Net sales made under warranty in2016 were $207 million. Fifteen percent of the units sold werereturned in 2016 and repaired or replaced at a cost of $5.20million. The amount of warranty expense on Angel's 2016 incomestatement is: |
$31.05 million.
$12.42 million.
$5.20 million.
$15.82 million.
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