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Magenta Ltd has two divisions, Turquoise and Pink, each of which is a separate cash-
generating unit. Magenta Ltd adopts a decentralised management approach whereby unit
managers are expected to operate their units. However, there is one corporate asset, the
information technology network to the company as a whole. The information technology
network is not a depreciable asset.
At 30 June 2010, the net assets of each division, including its allocated share of the information
technology network, were as follows
Turquoise Pink
Information technology network $ 284 000 $ 116 000
Land 450 000 290 000
Plant (20% p.a. straight-line depreciation) 1 310 000 960 000
Accumulated depreciation (917 000) (384 000)
Goodwill 46 000 32 000
Patent (10% straight-line amortisation) 210 000 255 000
Accumulated amortisation – patent (21 000) (102 000)
Cash 20 000 12 000
Inventory 120 000 80 000
Receivables 34 000 40 000
Liabilities (276 000) (189 000)
Net assets 1 260 000 1 110 000
Lemon Ltd determined the value in use of the unit to be $535 000. The receivables were
considered to be collectable, except those considered doubtful. The company allocated the
impairment loss in accordance with IAS 36.
During the 2009 -2010 period, Lemon Ltd increased the depreciation charge on buildings to
$65 000 p.a. and to $50 000 p.a. for factory machinery. The inventory on hand at 1 July 2009
was sold by the end of the year. At 30 June 2010, Lemon Ltd, because of a return in the market
to the use of traditional barrels for wines and an increase in wine production, assessed the
recoverable amount of the cash-generating unit to be $30 000 greater than the carrying amount
of the unit. As a result, Lemon Ltd recognised a reversal of the impairment loss.
Required
a. Prepare the journal entries for Lemon Ltd at 30 June 2009 and 2010
b. What differences would arise in relation to the answer in requirement a if the
recoverable amount at 30 June 2010 was $20 000 greater than the carrying amount of
the unit?
c. If the recoverable amount of the buildings at 30 June 2010 was $175 000, how would
this change the answer to requirement B?