MC Question 17
Telepath Co has a year end of 30 September and owns an item of plant which it uses to produce and package pharmaceuticals. The plant cost $750,000 on 1 October 20X0 and, at that date, had an estimated useful life of five years.
A review of the plant on 1 April 20X3 concluded that the plant would last for a further three and a half years and that its fair value was $560,000.
Telepath Co adopts the policy of revaluing its non-current assets to their fair value but does not make an annual transfer from the revaluation surplus to retained earnings to represent the additional depreciation charged due to the revaluation.
On 30 September 20X3, Telepath Co was informed by a major customer that it would no longer be placing orders with Telepath Co.
As a result, Telepath revised its estimates that net cash inflows earned from the plant for the next three years would be:
| Year ended 30 September: | $ | |
|---|---|---|
| 20X4 | 220,000 | |
| 20X5 | 180,000 | |
| 20X6 | 200,000 |
Telepath Co’s cost of capital is 10% which results in the following discount factors:
| Value of $1 at 30 September: | ||
|---|---|---|
| 20X4 | 0·91 | |
| 20X5 | 0·83 | |
| 20X6 | 0·75 |
Telepath Co also owns Rilda Co, a 100% subsidiary, which is treated as a cash generating unit.
On 30 September 20X3, there was an impairment to Rilda’s assets of $3,500,000.
The carrying amount of the assets of Rilda Co immediately before the impairment were:
| $ | ||
|---|---|---|
| Goodwill | 2,000,000 | |
| Factory building | 4,000,000 | |
| Plant | 3,500,000 | |
| Receivables and cash (at recoverable amount) | 2,500,000 | |
12,000,000 |
Prior to considering any impairment, what is the carrying amount of Telepath Co’s plant and the balance on the revaluation surplus at 30 September 20X3?
| Plant carrying amount | Revaluation surplus | |
|---|---|---|
| $000 | $000 | |
| A | 480 | nil |
| B | 300 | 185 |
| C | 480 | 185 |
| D | 300 | nil |