Reference no: EM132569271
Explain all the relevant accounting issues relating to the following events and determine how you would expect them to be included in Entity C's financial statements for the year ended 31 March 2020.
i) Division One has been losing money for a number of years. The Directors of Entity C have decided that they would close down Division One by June 2020. A discussion with a potential buyer started in February 2020. By the end of March 2020, there was no firm sales agreement. However, it has been indicated that the net selling price might be £500,000 less than the current carrying amount of Division One. The directors have also estimated that future redundancy cost up to £1m might be incurred.
ii) Division Two of Entity C manufactures and supplies one product. In April 2020, the company discovered a major design fault and decided to recall all the products sold in the year ended 31 March 2019 and 2020. Revenue for 2019 and 2020 was £1.3m and £2.7m respectively. There is no previous recall in Entity C's history and the directors are unsure for how long the refund period should last. A customer has issued a lawsuit against Entity C in early May claiming compensation for injury caused by the design fault.
iii) Entity C has a subsidiary - Three. It was purchased a few years ago when the payment exceeded the fair value of the subsidiary by £180,000. The following assets and liabilities of Subsidiary Three are available at 31 March 2020:
£'000
Plant and machinery 450
Equipment 150
Patent 90
Inventory 50
Receivables 40
Bank overdraft 20
Payables 35
Inventory, receivables and payables are all stated at their fair values. Subsidiary Three has the following expected cash flows in the next 3 years.
£'000
2021 100
2022 75
2023 50
Cash flows generated from 2023 and beyond are expected to stay at £50,000. The cost of capital for Entity C and its subsidiary Three for the purpose of impairment loss review is 10% p.a.
Question 1: Determine the impairment loss and show clearly how the loss should be accounted for in 2020 in Entity C.