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ACCA Applied Knowledge · Financial Accounting · Associates

Epsilon acquired 40% of Zeta on 1 July for $500,000 when Zeta's net assets had a fair value of $1,000,000. Zeta's profit after tax for the year ended 31 December was $160,000, earned evenly through the year. Zeta paid no dividends. At 31 December, an impairment review shows the investment in the associate is worth $540,000 recoverable amount. What is the amount of impairment loss to be recognised?

No impairment loss arises. The investment's carrying amount is $532,000, being cost of $500,000 plus 40% of six months' profit ($32,000). Because the recoverable amount of $540,000 is higher than the carrying amount, the investment is not impaired and nothing is recognised.

  1. A$24,000Correct
  2. B$0
  3. C$100,000
  4. D$36,000

Explanation

Share of post-acquisition profit = 40% x 160,000 x 6/12 = $32,000. Carrying amount = 500,000 + 32,000 = $532,000. Recoverable amount $540,000 exceeds this, so no impairment arises. Option $24,000 would wrongly be computed with the wrong comparison; the correct result is nil.

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