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ACCA Applied Skills · Financial Reporting · The concepts and principles of groups and consolidated financial statements

Cedar acquired 25% of Birch on 1 July 20X1 for $600,000. Birch's profit after tax for the year ended 31 December 20X1 was $240,000, accruing evenly. At 31 December 20X1 Cedar's investment is tested for impairment and its recoverable amount is $640,000. Birch's profits for the post-acquisition period had also been affected by a fair value uplift on depreciable plant: at acquisition, plant had a fair value $80,000 above carrying amount, with a remaining life of 4 years. What is the carrying amount of the investment at 31 December 20X1?

The carrying amount is $627,500. Birch's six-month post-acquisition profit of $120,000 is reduced by $10,000 of extra depreciation on the fair value uplift, giving $110,000. Cedar's 25% share is $27,500, added to cost of $600,000. Recoverable amount exceeds this, so no impairment.

  1. A$640,000
  2. B$627,500Correct
  3. C$652,500
  4. D$622,500

Explanation

Post-acquisition profit for 6 months = 120,000. Extra depreciation = 80,000/4 x 6/12 = 10,000, so adjusted profit = 110,000. Share = 25% x 110,000 = 27,500. Carrying amount = 600,000 + 27,500 = 627,500, which is below the recoverable amount of 640,000, so there is no impairment. $652,500 would result from adding the depreciation back.

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