Stay Dry Raincoats Uses Three Different Machines (A, B, and

question 114

Essay

Stay Dry Raincoats uses three different machines (A, B, and
C)to manufacture raincoats. These machines are considered to be a cash generating unit (CGU). Due to climate change and changes in consumer preferences, demand for raincoats has declined in recent years. The following information is relevant to the evaluation of impairment.
$\begin{array}{c}\begin{array}{|l}\hline \text { } \\\hline \text { Net carrying value} \\\hline \text { Fair value less costs to sell} \\\hline \text { Value in use } \\\hline\end{array}\begin{array}{|r|}\hline\mathrm{A} \\\hline 800,000 \\\hline 1,000,000 \\\hline \text { NA } \\\hline\end{array}\begin{array}{r}\hline\mathrm{B} \\\hline 1,430,000 \\\hline 1,330,000 \\\hline \text { NA }\\\hline\end{array}\begin{array}{|r|}\hline\mathrm{C} \\\hline 1,170,000 \\\hline 670,000 \\\hline \text { NA }\\\hline\end{array}\begin{array}{r|}\hline\text { Total } \\\hline 3,400,000 \\\hline 3,000,000 \\\hline 2,700,000\\\hline\end{array}\end{array}$

Required:
Determine the amount of impairment loss that should be recorded for the cash generating unit and for each of the three machines.

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Definitions:

Gross Profit

The financial metric representing the difference between revenue from sales and the cost of goods sold, before deducting overheads, payroll, taxation, and interest payments.

Balance Sheet

A financial statement that summarizes a company's assets, liabilities, and shareholders' equity at a specific point in time, providing a snapshot of its financial health.

LIFO Assumption

An inventory valuation method in which the last items purchased or produced are the first to be expensed (Last In, First Out).

Perpetual Inventory

A method of accounting for inventory that records the sale or purchase of inventory immediately through the use of computerized point-of-sale systems and enterprise asset management software.