13 Impairment of Assets

IMPAIRMENT OF ASSET 5.

Explain the meaning of "fair value less cost cost of disposal". Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Cost of disposal is an incremental cost directly attributable to the disposal of an asset or cash generating unit, excluding finance cost and income tax expense. Examples of cost of disposal include legal cost, stamp duty and similar transaction tax, cost of removing the asset, and direct cost in bringing the asset into condition for sale. In simple terms, fair value less cost of disposal is equal to the exit price or selling price of an asset minus cost of disposal.

6.

Explain the "fair value hierarchy". hierarchy".

Essay Questions 1.

What is the meaning meaning of "impairment "impairment of asset"? Impairment of asset is a fall in the market value of an asset so that its recoverable recoverable amount is now less than its carrying amount in the statement of financial position.

2.

What are the external external sources sources that would would indicate indicate impairment impairment of an asset? a. b.

Significant decrease decrease or decline decline in the market value of the asset. Significant change in the technological, technological, market, market, legal or economic environment environment of the business in which the asset is employed. c. An increase in the the interest rate or market market rate of return on investment which which will likely affect the discount rate used in calculating the value in use. d. The carrying amount amount of net assets of the the entity is more than the "market capitalization". capitalization".

PFRS 13, paragraph 72, enumerates the fair value hierarchy or best evidence of fair value in descending order as follows: 1. Level 1 inputs are the quoted prices in an active market market for identical assets. assets. 2. Level 2 inputs inputs are inputs inputs that are observable observable either either directly or indirectly. indirectly. Level 2 inputs inputs include quoted prices for similar assets in an active market and quoted prices for identical or similar assets in a market that is not active. 3. Level 3 inputs are unobservable unobservable inputs inputs for the asset that are usually ly developed by the entity using the best available information from the entity's own data. An example is the financial forecast of the net cash inflows from the asset.

In other words, the carrying amount exceeds the fair value of the net assets. The list is not exhaustive. An entity may identify other factors that would indicate impairment of an asset.

3.

What are the internal internal sources sources that would would indicate impairment of of an asset? asset? a. b. c.

Evidence of obsolescence obsolescence or physical physical damage damage of an asset. asset. Significant change in the manner manner or extent in which the asset asset is used with an adverse adverse effect on the entity. Evidence that the economic economic performance performance of an asset asset will be worse than expected. expected.

7.

 An active market is a market in which transactions for the asset or liability take place with sufficient regularity and volume volume to provide pricing pricing information on an ongoing basis. basis. A principal market is the market with the greatest volume and level of activity for the asset or liability.

For example, the undiscounted net cash flows from the asset are significantly below the amount budgeted.

4.

The market participants are the buyers and sellers in the principal market who are independent or unrelated parties, knowledgeable or having a reasonable understanding of the transactions and willing or motivated but not forced and compelled.

What is the "recoverable "recoverable amount" of an impaired asset? The "recoverable amount" of an asset is the fair value less cost of disposal or value in use, whichever is higher.

Define active active market, principal market and market market participants.

8.

Explain the meaning of "value in use".

Value in use is measured as the present value of estimated future net cash flows expected to be derived from an asset. The cash flows are pretax cash flows and pretax discount discount rate is applied in determining the present value. The following guidelines are used in determining value in use: a. Cash flow projections projections shall be based on reasonable reasonable and supportable supportable assumptions. assumptions. b. Cash flow projections projections shall be based on the most recent recent budgets on financial forecasts, forecasts, usually up to a maximum period of 5 years, unless a longer period can be justified. c. Cash flow projections projections beyond the 5-year period period shall be estimated by extrapolating the 5-year projections using a steady or declining growth rate each subsequent year, unless an increasing rate can be justified.

9.

What are the components of "estimated future cash flows" for purposes purposes of determining value value in use? Estimates of future cash flows include: a. Projections of cash inflows inflows from the continuing continuing use of the asset. asset. b. Projections of cash outflows outflows necessarily ly incurred to generate the cash cash inflows from the continuing use of the asset. c. Net cash flows received or paid paid on the disposal disposal of the asset asset at the end of its useful useful life in an arm's length transaction.

10. What cash flows flows are excluded excluded in determining determining value value in use? In determining value in use, estimates of future cash flows exclude the following: a. Future cash flows flows relating to restructuring restructuring to which the entity entity is not yet committed. committed. b. Future costs of improving or or enhancing the asset's performance. performance. c. Cash inflows inflows or outflows from financing financing activities. activities. d. Income tax receipts receipts or payments. payments.

11. How is the impairment impairment loss loss recognized? recognized? The basic principle is that "if an asset's recoverable amount is lower than the carrying amount, the asset is judged to have suffered suffered an impairment loss". loss". Accordingly, the impairment loss shall be recorded immediately by reducing the asset's carrying amount to the recoverable amount.

The impairment loss is recognized in profit or loss and presented separately in the income statement.

12. Explain fully a "cash "cash generating generating unit". unit".  A cash generating unit is the smallest identifiable group of assets that generate cash inflows from continuing use that are largely independent of the cash inflows from other assets or group of assets. In practice, a cash generating unit may be a department, department, a product line, or a factory for which the output of product and the input of raw materials, labor and overhead can be identified.  As a basic rule, the recoverable amount of an asset shall be determined for the asset individually. However, if it is not possible to estimate the recoverable recoverable amount of the individual asset, an entity shall determine the recoverable amount of the cash generating unit to which the asset belongs that the cash generating unit must be the smallest aggregation of assets for which cash flows can be identified and which are independent of cash flows from other assets or group of assets.  An aggregation that is "too high" is prohibited. For example, an entity is overall quite profitable and generates generates positive cash flows. flows. However, there are some some departments or product lines that are significantly unprofitable unprofitable and cash drains. If aggregation is done at the "entity level", there would would be no impairment to be recognized. recognized. On the other hand, if the impairment testing is done at the "department or product line level", some "loss-producing assets" would be written down to recoverable amount. The "cash generating assets" would continue to be accounted for at carrying amount.

13. Explain the recognition recognition of an an impairment loss loss of a cash cash generating generating unit. PAS 36, paragraph 104, provides that when an impairment loss is recognized for a cash generating unit, such loss shall be allocated to the assets of the unit in the following order: a. First, to the goodwill allocated allocated to the cash generating unit. b. Then, to all other noncash assets assets of the cash generating generating unit prorata based on carrying carrying amount. Paragraph 105 further provides that the carrying amount of an asset shall not be reduced below the highest of fair value ue less cost to sell, value in use use and zero. The amount of

impairment loss that would otherwise have been allocated to the asset shall be allocated prorata to the other assets of the unit.

determined and compared with the carrying amount of the cash generating unit.

17. Explain the reversal of an impairment loss. 14. How is the impairment of a cash generating unit determined? PAS 36, paragraph 90, provides that a cash generating unit to which goodwill has been allocated shall be tested for impairment at least annually by comparing the carrying amount of the unit, i ncluding the goodwill, with the recoverable amount. a.

If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit and the goodwill allocated to that unit shall be regarded as not impaired. b. If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity must recognize an impairment loss.

15. What is the "carrying amount of a cash generating unit"? PAS 36; paragraph 76, provides that the carrying amount of a cash generating unit includes "the carrying amount of only those assets that can be attributed directly or allocated on a reasonable and consistent basis to the cash generating unit" and shall generate the future cash inflows used in determining the value in use of the cash generating unit. Paragraph 76 further provides that the carrying amount of the cash generating unit does not include the carrying amount of any recognized liability, unless the recoverable amount of the cash generating unit cannot be determined without consideration of the liability.

16. Explain corporate assets and their impairment. Corporate assets are assets other than goodwill that contribute to the future cash flows of both the cash generating unit under review and other cash generating units. Corporate assets are group or divisional assets such as head office building, EDP, equipment or a research center. Essentially, corporate assets are assets that do not generate cash inflows independently from other assets. Thus, the recoverable amount of an individual corporate asset cannot be determined unless management has decided to dispose of the asset.  As a consequence, if there is an indication t hat a corporate asset may be impaired, the recoverable amount of the cash generating unit to which the corporate asset belongs is

If the recoverable amount of an asset that has previously been impaired turns out to be higher than the asset's current carrying amount, the carrying amount of the asset shall be increased to its new recoverable amount. However, PAS 36, paragraph 117, provides that "the increased carrying amount of an asset due to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years." The reversal of the impairment loss shall be recognized immediately in profit or loss. But any reversal of an impairment loss on a revalued asset shall be treated as a revaluation increase. PAS 36, paragraph 124, explicitly provides that an impairment loss recognized for goodwill shall not be reversed in a subsequent period.

18. Explain the impairment of intangible assets. Impairment of intangible assets is recognized in accordance with PAS 36 on impairment of assets. An impairment loss on an intangible asset is recognized if the recoverable amount is less than the carrying amount. The recoverable amount of the intangible asset is the higher between the fair value less cost of disposal and value in use. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Value in use is the present value of future cash flows expected to be derived from.an asset.

19. Explain the impairment of goodwill. PAS 38, paragraph 107, mandates that goodwill shall not be amortized because the useful life is indefinite. However, goodwill shall be tested for impairment at least annually and whenever there is an indication that it may be impaired. Goodwill does not generate cash flows independently from other assets or group of assets, and therefore, the recoverable amount of goodwill as an individual asset cannot be determined. As a consequence, if there

is an indication that goodwill may be impaired, recoverable amount is determined for the cash generating unit to which goodwill belongs.

6.

These are assets other than goodwill that contribute to the future cash flows of both the cash generating unit under review and other cash generating units.  A. Corporate assets C. Group B. Property, plant and equipment D. Cash generating unit FA © 2014

7.

Which of the following statements is incorrect concerning corporate assets?  A. Essentially, corporate assets generate cash inflows independently from other assets. B. Corporate assets are group or divisional assets such as I head office building, EDP, equipment or a research center. C. The recoverable amount of an individual corporate asset I cannot be determined unless management has decided I to dispose of the asset. D. If there is an indication that a corporate asset may be I impaired, the recoverable amount of the cash generating! unit to which the corporate asset belongs is determined and compared with the carrying amount of the cash generating unit. FA © 2014

Multiple Choice - Theory Basic concepts 1. The impairment rules for long-lived assets apply to all of the following, except  A. Land B. Financial instrument C. Building currently used in business D. Minicomput er used to run a production process

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2.

It is a fall in the market value of an asset so that the recoverable amount is now less than the carrying amount in the statement of financial position.  A. Amortization C. Depreciation B. Decline in value D. Impairment TOA © 2013

3.

What is impairment of asset?  A. A change in the estimated useful life of an asset. B. An allocation of cost over the useful life of an asset. C. A decline in value of an asset so that the recoverable amount is more than carrying amount. D. A fall in the market value of an asset so that the recoverable amount is less than carrying amount. FA © 2014

4.

It is the smallest identifiable group of assets that generate cash inflows from continuing use that are largely independent of the cash inflows from other assets or group of assets.  A. Cash generating unit C. Goodwill B. Corporate asset D. The entity as a whole TOA © 2013

When impairment testing a cash generating unit, any corporate assets shall  A. Be separately impairment tested. B. Not be allocated to cash generating units. C. Be allocated on a reasonable and consistent basis. D. Be included in the head office assets or parent's assets and impairment tested along with that cash generating unit. FA © 2014

5.

What is a cash generating unit?  A. The group of assets that generate cash inflows from continuing use that are largely independent of the cash flows from other group of assets. B. The group of assets that generate cash inflows from continuing use that are not independent of the cash flows from other group of assets. C. The largest group of assets that generate cash inflows from continuing use that are largely independent of the cash flows f rom other group of assets. D. The smallest group of assets that generate cash inflows from continuing use that are largely independent of the cash inflows from other group of assets. FA © 2014

10. The internal sources of information indicating possible impairment include all of the following, except  A. Significant decrease in the market value of the asset. B. Evidence of obsolescence or physical damage of an asset. C. Evidence that the economic performance of an asset will be worse than expected. D. Significant change in the manner or extent in which the asset is used with an adverse effect on the entity. TOA © 2013

Impairment testing 8. Long-lived assets are required to be reviewed for impairment  A. When the asset is fully depreciated. B. Every year at the end of reporting period. C. Every three years at the end of reporting period. D. When circumstances indicate that the carrying amount of an asset might not be recoverable. FA © 2014 9.

11. The internal sources of information indicating possible impairment include all of the following, except  A. Obsolescence or physical damage of an asset. B. Significant decrease in the market value of the asset. C. Evidence that the economic performance of an asset will be worse than expected. D. Significant change in the manner or extent in which the asset is used with an adverse effect on the entity. FA © 2014 12. The external sources of information indicating possible impairment include all of the following, except  A. Significant decrease in budgeted net cash flows flowing from the asset. B. The carrying amount of the net assets of the entity is more than the market capitalization. C. Significant change in the technological, market, legal or economic environment of the business in which the asset is employed. D. An increase in the interest rate or market rate of return on investment which will likely affect the discount rate used in calculating value in use. FA © 2014 13. When an entity is considering whether to apply an impairment test to an individual asset or to the cash generating unit to which that asset belongs, which of the following statements is true? I. If the individual asset does not generate cash inflows that are largely independent of those from other assets, the cash generating unit shall be identified. II. If the individual asset generates an insignificant proportion of the cash inflows of the entity as a whole, the cash generating unit shall not be identified.  A. I only C. Both I and II B. II only D. Neither I nor II TOA © 2013 Recognition 14. Which of the following statements is true is relation to recognition of impairment? I. An impairment loss shall be recognized in profit or loss immediately. II. After the recognition of an impairment loss, depreciation charge for the future periods shall be adjusted to allocate the revised carrying amount, less residual value, on a systematic basis over the remaining useful life.  A. I only C. Both I and II B. II only D. Neither I nor II TOA © 2013 15. An impairment loss that relates to an asset that has been revalued shall be recognized in  A. Profit or loss B. Any reserve in equity

C. Opening retained earnings D. Revaluation surplus that relates to the revalued asset

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Measurement 16. An entity shall test an intangible asset with indefinite useful life or an intangible asset not yet available for use, or goodwill acquired in business combination for impairment  A. Annually C. On acquisition of subsidiary FA © 2014 B. Every 5 years D. If there is an indication of impairment 17. What is the recoverable amount of an asset?  A. Value in use B. Fair value less cost of disposal C. Fair value less cost of disposal or value in use, whichever is lower D. Fair value less cost of disposal or value in use, whichever is higher

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18. What is fair value of an asset?  A. The discounted value of future cash flows expected to be derived from the asset. B. The undiscounted value of future cash flows expected to be derived from an asset. C. The price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. D. The price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. FA © 2014 19. Fair value is defined as I. The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. II. Present value of estimated future cash flows expected to arise from the continuing use of an asset and from the disposal at the end of the useful life.  A. I only C. Both I and II B. II only D. Neither I nor II TOA © 2013 20. What is the best evidence of fair value?  A. Quoted price in an active market for similar asset. B. Quoted price in an inactive market for similar asset. C. Quoted price in an active market for identical asset. D. Quoted price in an inactive market for identical asset.

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21. An active market is I. The market in which transactions for the asset or liability take place with sufficient

regularity and volume to provide pricing information on an ongoing basis. II. The market with the greatest volume and level of activity for the asset or liability.  A. I only C. Both I and II B. II only D. Neither I nor II FA © 2014 22. Costs of disposal include all of the following, except  A. Cost of removing the asset C. Legal cost FA © 2014 B. Finance cost D. Stamp and similar transaction tax 23. Which of the following statements best describes "value in use"?  A. The amount which an entity expects to obtain for an asset at the end of its useful life. B. The amount of cash or cash equivalents that could currently be obtained by selling an asset in an orderly disposal. C. The amount at which an asset could be exchanged between knowledgeable and willing parties in an arm's length transaction. D. The present value of estimated future cash flows expected to arise from the continuing use of an asset and from its ultimate disposal. FA © 2014 24. Value in use of an asset is equal to  A. Discounted future net cash flows from the use of the asset B. Undiscounted future net cash flows from the use of the asset FA © 2014 C. Discounted future net cash flows from the use and eventual disposition of the asset D. Undiscounted future net cash flows from the use and eventual disposition of the asset 25. Estimates of future cash flows normally would cover projections over a maximum of  A. Five years C. Fifteen years B. Ten years D. Twenty years FA © 2014 26. The estimates of future cash flows in calculating value in use include all of the following, except  A. Cash inflows from the continuing use of the asset B. Future cost of improving or enhancing the asset's performance C. Net cash flows from the disposal of the asset at the end of the useful life FA © 2014 D. Cash outflows incurred to generate the cash inflows from the continuing use of the asset 27. When deciding on the discount rate in determining value in use, which factor should not be taken into account?  A. Pretax discount rate. B. The time value of money. FA © 2014

C. Risk specific to the asset for which future cash flow estimate has been adjusted. D. Risk specific to the asset for which future cash flow estimate has not been adjusted. 28. Which of the following statements is incorrect concerning the estimate of future cash flows?  A. Future cash flows do not include income tax receipts or payments. B. Future cash flows shall be based on reasonable and supportable assumptions. C. The discount rate used in estimating future cash flows shall be the current rate after tax. D. Future cash flows shall be based on the most recent budget or financial forecast, usually up to a maximum of 5 years. FA © 2014 29. Which of the following is not relevant in determining value in use?  A. The time value of money. B. The carrying amount of the asset. C. The expected future cash flows from the asset. FA © 2014 D. Expectation about possible variation in the amount and timing of future cash flows. 30. Which of the following terms best describes the higher of fair value less cost of disposal and value in use?  A. Carrying amount C. Recoverable amount B. Depreciable amount D. Revalued amount FA © 2014 31. If the fair value less cost of disposal cannot, be determined  A. The asset is not impaired. B. The net realizable value is used. C. The recoverable amount is the value in use. D. The carrying amount of the asset remains the same.

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32. If the assets are to be disposed of  A. The asset is not impaired. B. The recoverable amount is the value in use. C. The recoverable amount is the carrying value. D. The recoverable amount is the fair value less cost of disposal.

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33. What is the allocation of an impairment loss recognized for a cash generating unit?  A. Across the assets of the unit based on fair value. B. Across the assets of the unit based on carrying amount. C. First, to any goodwill, and the balance to the other assets prorata based fair value. D. First, to any goodwill, and the balance to the other assets prorata based on carrying amount FA © 2014

34. Which of the following statements best describes the term "impairment loss"?  A. The removal of an asset from an entity's statement of financial position. FA © 2014 B. The systematic allocation of an asset's cost less residual value over its useful life. C. The amount by which the recoverable amount of an asset exceeds its carrying amount. D. The amount by which the carrying amount of an asset exceeds its recoverable amount. 35. How is the loss calculated for an impaired asset?  A. Fair value less carrying amount. B. Cash outflows needed to obtain cash inflows. C. Future discounted cash flows less carrying amount. D. Future undiscounted cash flows less carrying amount.

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36. Impairment loss for productive asset shall be reported  A. As an extraordinary item. B. As a change in accounting estimate. C. As a component of discontinued operation. D. As a component of income from continuing operations.

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37. An entity is considering to apply an impairment test to an individual asset or to the cash generating unit to which the asset belongs. Which of the following statements is true?  A. If the individual asset generates a significant proportion of cash inflows of the entity as a whole, the cash generating unit should not be identified. B. If the individual asset does not generate cash inflows that are largely independent from other assets, the cash generating unit should be identified. C. If the individual asset generates an insignificant proportion of the cash inflows of the entity as a whole, the cash generating unit should not be identified. D. All of these statements are true. FA © 2014 38. Which of the following statements is correct about the carrying amount of long-lived asset after an impairment loss has been recognized? I. The reduced carrying amount of the asset may be increased in subsequent years if the impairment loss has been recovered. II. The reduced carrying amount of the asset represents the amount that should be depreciated over the remaining useful life of the asset.  A. I only C. Both I and II B. II only D. Neither I nor II FA © 2014 39. All of the following statements are true with regard to impairment of asset, except

 A. If impairment indicators are present, the entity must conduct an impairment test. B. If recoverable amount is higher than carrying amount, no impairment loss is recognized. C. If the recoverable amount is lower than carrying amount, an impairment loss is recognized. D. The impairment test compares the carrying amount with the lower of fair value less cost of disposal and value in use. FA © 2014 Reversal of impairment 40. Which of the following statements is true concerning reversal of an impairment loss? I. The increased carrying amount of the asset due to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined had no impairment loss been recognized in the prior years. II. An impairment loss recognized for goodwill shall not be reversed in a subsequent period.  A. I only C. Both I and II B. II only D. Neither I nor II TOA © 2013 41. Which of the following statements is true concerning the reversal of an impairment loss? I. The reversal of the impairment loss shall recognized immediately as an adjustment of the opening balance of retained earnings. II. The carrying amount of the asset shall be increased to the new recoverable amount.  A. I only C. Both I and II B. II only D. Neither I nor II TOA © 2013 42. Which of the following statements is true concerning reversal of an impairment loss? I. The increased carrying amount of the asset due to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined had no impairment loss been recognized in the prior years. II. An impairment loss recognized for goodwill may be reversed in a subsequent period.  A. I only C. Both I and II B. II only D. Neither I nor II FA © 2014 Journal entry 43. When an entity determined that an equipment used in operations has suffered impairment in value, the entry to record the impairment should  A. Include a credit to equipment. B. Include a credit to accumulated depreciation. C. Not be made if the equipment is still being used. D. Recognize extra depreciation expense for the period. FA © 2014

Multiple Choice – Problems: Basic Problems 5.

On January 1, 2010, Walton Company purchased a machine for P2,000,000 and established an annual straight line depreciation rate of 10%, with no residual value. During 2014, the entity determined that the machine will not be economically useful in production process after December 31, 2014. The entity estimated that the machine had no residual value on December 31, 2014 and would be disposed of in early 2015 at a cost of P50,000. In the income statement for the year ended December 31, 2014, what amount of impairment loss should be reported for the machine?  A. 50,000 C. 1,050,000 B. 1,000,000 D. 1,250,000 P1 © 2014

Impairment loss 1. On January 1, 2013, Laity Company purchased a patent with a cost of P5,200,000 and a useful life of ten years. On December 31, 2014, the entity determined that impairment indicators were present'. The fair value less cost of disposal of the patent was estimated to be P3,600,000. The, value in use is estimated to be P3,800,000. What amount should be reported as impairment loss for 2014?  A. 0 C. 560,000 B. 360,000 D. 880,000 FA © 2014 2.

At the beginning of current year, Uptown Company acquired an intangible asset for P3,000,000. The intangible asset has an estimated useful life of 10 years. At the current yearend, the intangible asset was evaluated to determine whether it was impaired. On same date, the fair value less cost of disposal of the intangible asset is P2,000,000. The asset is expected to generate future cash flows of P300,000 annually for the remaining 9 years. The appropriate discount rate is 5%. The present value of an ordinary annuity of 1 at 5% for nine periods is 7.11. What is the impairment loss to be recognized for the current year?  A. 0 C. 700,000 B. 567,000 D. 867,000 FA © 2014

6.

Blake Company purchased a building on January 1, 2011 for P10,000,000. The building has been depreciated using the straight line method with a 25-year useful life and no residual value. On December 31, 2014, t he entity is evaluating the building for possible impairment. The building has a remaining useful life of 15 years and is expected to generate cash inflows of P700,000 per year. The applicable discount rate is 8%. Round off present value factor to two decimal places. The fair value of the building on December 31,2014 is P5,300,000. What amount should be recognized as impairment loss for 2014?  A. 0 C. 3,100,000 B. 2,408,000 D. 4,700,000 P1 © 2014

3.

Listless Company acquired equipment on January 1, 2013 for P5,000,000. The equipment had a 10-year useful life and no residual value. Cm December 31, 2014, the following information was obtained: Expected value of undiscounted cash flows 3,600,000 Fair value estimated with in-use premise 3,700,000 Fair value estimated with in-exchange premise 3,500,000 What amount should be recognized as impairment loss for 2014?  A. 0 C. 400,000 B. 300,000 D. 500,000 FA © 2014

7.

4.

On January 1, 2014, Leah Company owned a machine having a carrying amount of P2,400,000. The machine was purchased four years earlier for P4,000,000. The straight line depreciation is used. During December 2014, the entity determined that the machine suffered permanent impairment and will not be economically useful after December 31, 2014. The entity sold the machine for P650,000 on January 5,2015. What amount should be recognized as impairment loss in 2014?  A. 0 C. 1,750,000 B. 1,350,000 D. 2,000,000 FA © 2014

On December 31,2014, Zee Company has an equipment with the following cost and accumulated depreciation: Equipment 9,000,000  Accumulated depreciation 3,000,000 Due to obsolescence and physical damage, the equipment is found to be impaired. On December 31,2014, the entity has determined the following information related to the equipment: Fair value less cost of disposal 4,500,000 Value in use or discounted net cash inflows 4,000,000 What amount should be reported as impairment loss for 2014?  A. 0 C. 1,500,000 B. 500,000 D. 2,000,000 P1 © 2014

8.

During December 2014, Bubba Company determined that there had been a significant decrease in market value of an equipment used in the manufacturing process. On December 31,2014, the entity compiled the following information: Original cost of equipment 5,000,000  Accumulated depreciation 3,000,000

Expected undiscounted net future cash inflows related to the continued use and eventual disposal of the equipment 1,750,000 Fair value of equipment 1,250,000 What amount of impairment loss should be reported in the income statement for the year ended December 31, 2014?  A. 250,000 C. 3,250,000 B. 750,000 D. 3,750,000 P1 © 2014 9.

Synthia Company, a clothing manufacturer, purchased a sewing machine for P2,000,000 on July 1, 2011. The machine had a 10-year life, a PI00,000 residual value, and was depreciated using the straight line method. On January 1, 2014, a test for impairment indicated that the undiscounted cash flows from the sewing machine are less than carrying amount. The machine's fair value on January 1,2014 is P600,000. What is the loss on impairment?  A. 830,000 C. 950,000 B. 925,000 D. 1,300,000 FA © 2014

10. Silver Company had an equipment with a carrying amount of P450,000 at year-end. The following information was available at year-end: Expected undiscounted net cash flows 420,000 Expected discounted net cash flows 400,000 Fair value, using similar asset 415,000 Fair value, assuming the asset is sold stand-alone 428,000 What is the impairment loss that should be reported in the income statement for the current year?  A. 22,000 C. 35,000 B. 30,000 D. 50,000 11. Seafarer Company has an oil platform in the sea. The entity has to decommission the platform at the end of the useful life, and a provision was set up at the commencement of production. The carrying amount of the provision for decomissioning is P5,000,000. The entity has received an offer of P8,000,000 for the rights to the platform which reflects the fact that Seafarer Company has to decommission it at the end of the useful life. Disposal costs would be P500,000. The value in use of the oil platform is P12,000,000 ignoring the decommissioning cost. The carrying amount of the oil platform is P15,000,000. What amount should be recognized as impairment loss for the current year in relation to the oil platform?  A. 2,000,000 C. 3,000,000 B. 2,500,000 D. 7,500,000 FA © 2014 12. On December 31, 2014. Visayas Company showed the following intangible assets.

Trademark 6,000,000 Patent 3,000,000 The trademark has 8 years remaining in the legal life. However, it is anticipated that the trademark will be routinely renewed in the future. Thus, the trademark is considered to have an indefinite life. Because of an inflationary economy, the trademark is expected to generate cash flows of P200,000 per year. The appropriate discount rate is 10%. Mathematically, the discounted value of a stream of indefinite annual cash flows is simply computed by dividing the annual cash flow by the discount rate. The patent has a remaining economic life of 5 years. It is expected that the patent will generate cash flows of P500,000 per year. The appropriate discount rate is also 10%. The present value of an ordinary annuity of 1 at 10% for 5 periods is 3.79. What total amount should be recognized as impairment loss in 2014?  A. 0 C. 4,000,000 B. 1,105,000 D 5,105,000 P1 © 2014 13. At year-end, Bullheaded Company determined that there had been a significant decrease in market value of an equipment and compiled the following information: Original cost of equipment 5,000,000  Accumulated depreciation 3,000,000 Expected undiscounted net future cash inflows related to the continued use of the equipment 1,750,000 Fair value less cost of disposal of equipment 1,250,000 What amount of impairment loss should be recognized for the current year?  A. 250,000 C. 3,250,000 B. 750,000 D. 3,750,000 FA © 2014 14. On January 1, 2014, Downtown Company acquired the following intangible assets:  A t rademark for P2,000,000. The trademark has a remaining legal life of 8 years. The trademark will be renewed in the future indefinitely without problem.  A patent for P6,000,000. The patent has an economic life for just 5 years. On December 31, 2014, the intangible assets are tested for impairment. The trademark is now expected to generate cash flows of just P120,000 per year. The cash flows expected to be generated by the patent amount to PI,000,000 annually for each of the next 4 years. The appropriate discount rate for all intangible assets is 8%. The present value of an ordinary annuity of 1 at 8% for 4 periods is 3.31. What is the total impairment loss to be recognized for the current year?  A. 1,990,000 C. 1,300,000 B. 1,490,000 D. 4,810,000 FA © 2014 



Depreciation expense 15. Mortal Company acquired a machine for P3,200,000 on August 31, 2011. The machine has a 5-year useful life, a P500,000 residual value, and was depreciated using the straight line method. On May 31, 2014, a test for recoverability revealed that the expected net future undiscounted cash inflows related to the continued use and eventual disposal of the machine amount to P1,500,000. The fair value less cost of disposal of the machine on May 31, 2014 is P1,350,000 with no residual value. Assuming a loss on impairment is recognized on May 31, 2014, what is the depreciation of the machine for June 2014?  A. 45,000 C. 51,000 B. 50,000 D. 53,000 FA © 2014 16. Kinsman Company acquired a machine on January 1, 2014 for P8,000,000. The machine had a 10-year useful life, P500,000 residual value, and is to be depreciated using the straight line method. By the end of 2015, the machine was damaged by a major accident occurring in the plant. The engineers and technicians could not repair this damage and therefore the machine's performance was expected to decline in the future. It is now determined that the machine had a remaining life of 5 years and a zero residual value. On December 31, 2015, a test for recoverability revealed that the expected net future undiscounted cash flows related to the continued use and eventual disposal of the machine totaled P7,000,000. The fair value less cost of disposal of the machine on December 31, 2015 is P6,600,000 while the discounted net future cash flows amount to P6,300,000. What amount of depreciation should be recognized for 2016?  A. 1,260,000 C. 1,320,000 B. 1,300,000 D. 1,400,000 FA © 2014 17. Kenya Company acquired a machine on January 1, 2013 for P8,000,000. The machine has a 10-year useful life, a P500,000 residual value, and is to be depreciated using the straight line method. By the end of 2014, the machine was damaged by a major accident occurring in the plant. The engineers and technicians could not repair this damage and therefore the machine's performance was expected to decline in the future and unlikely to be sold at the end of the useful life. Thus, the machine has a zero residual value. On December 31,2014, a test for recoverability revealed that the expected net future undiscounted cash flows related to the continued use and eventual disposal of the machine totaled P7,000,000. The fair value on December 31, 2014 is P6,600,000 while the discounted net future cash flows amount to P6,300,000. What is the depreciation expense that should be recognized for the year ended December 31, 2014?

 A. 750,000 B. 787,500

C. 812,500 D. 825,000

P1 © 2014

 Accumulated depreciation 18. Gei Company determined that, due to obsolescence, equipment with an original cost of P9,000,000 and accumulated depreciation on January 1, 2014, of P4,200,000 had suffered permanent impairment, and as a result should have a carrying amount of only P3,000,000 as of the beginning of the year. In addition, the remaining useful life of the equipment was reduced from 8 years to 3. In the December 31, 2014 statement of financial position, what amount should be reported as accumulated depreciation?  A. 1,000,000 C. 6,000,000 B. 5,200,000 D. 7,000,000 P1 © 2014 Carrying amount 19. Cynosure Company has an equipment with carrying amount of P1,600,000 on December 31,2014 after recording depreciation for 2014. The following information is available on December 31,2014 relative to the equipment: Fair value of similar equipment 1,400,000 Discounted future cash flows 1,300,000 Undiscounted future cash flows 1,350,000  At what amount should the equipment be reported on December 31, 2014?  A. 1,300,000 C. 1,400,000 B. 1,350,000 D. 1,600,000 FA © 2014 20. On January 1, 2011, Roundabout Company purchased a machine for P800,000 and established an annual depreciation charge of P100,000 over an eight-year life. During 2014, after issuing the 2013 financial statements, the entity concluded that the machine suffered permanent impairment of the operational value, and P200,000 is a reasonable estimate of the amount expected to be recovered through use of the machine for the period January 1, 2014 through December 31, 2018. What should be reported as carrying amount of the machine on December 31, 2014?  A. 0 C. 160,000 B. 100,000 D. 400,000 FA © 2014 21. On July 1,2011, Rey Company purchased computer equipment at a cost of P3,600,000. The equipment had a six-year life with no residual value and was depreciated by the straight line. On January 1,2014, the entity determined that this equipment had been permanently impaired, and that P700,000 could be recovered over the remaining useful life of the equipment. What is the carrying amount of the equipment on December 31,2014?

 A. 0 B. 500,000

C. 700,000 D. 1,500,000

P1 © 2014

22. In January 2012, Winn Company purchased equipment at a cost of P5,000,000. The equipment had an estimated residual value of PI,000,000, an estimated 8-year useful life, and was being depreciated by the straight line method. Two years later, it became apparent that this equipment suffered a permanent impairment of value. In January 2014, management determined the carrying amount should be only PI,750,000 with a 2-year remaining useful life, and the residual value should be reduced to P250,000. On December 31, 2014, what is the carrying amount of t he equipment?  A. 1,000,000 C. 1,750,000 B. 1,500,000 D. 3,500,000 P1 © 2014 23. Scarbrough Company had purchased equipment for P2,800,000 on January 1,2011. The equipment had an 8-year life and residual value of P400,000. The entity depreciated the equipment using the straight line method. In August 2014, the entity questioned the recoverability of the carrying amount of this equipment. On August 31,2014, the undiscounted expected net future cash inflows related to the continued use and eventual disposal of the equipment amounted to P1,600,000. The equipment's fair value on August 31, 2014 is PI,500,000. After any loss on impairment has been recognized, what is the carrying amount of the equipment?  A. 1,300,000 C. 1,600,000 B. 1,500,000 D. 1,700,000 FA © 2014 24. Bronze Company operates a production line which is treated as a cash generating unit. At year-end, the carrying amounts of the noncurrent assets of this cash generating unit are: Intangibles-goodwill 1,100,000 Tangibles-plant and machinery 2,200,000  At year-end, the recoverable amount of the production line is estimated at P2,700,000. What are the revised carrying amounts of the intangible and tangible noncurrent assets, respectively?  A. 500,000 and 2,200,000 C. 900,000 and 1,800,000 B. 800,000 and 1,900.000 D. 1,100,000 and 1,600,000 FA © 2014 Gain on reversal of impairment 25. Lobo Company reported an impairment loss of P2,000,000 in 2013. This loss was related to an item of property, plant and equipment which was acquired on January 1,2012 with cost of P10,000,000, useful life of 10 years and no residual value. On December 31,2013, the entity reported this asset at P6,000,000 which is the fair value on such date. On December

31,2014, the entity determined that the fair value of the impaired asset had increased to P7,500,000. The straight line method is used in recording depreciation. What amount of gain on reversal of impairment should be reported in the income statement for 2014?  A. 0 C. 1,750,000 B. 1,500,000 D. 2,250,000 P1 © 2014 26. Tausug Company reported the following calculation relating to an impairment loss suffered on December 31,2014: Goodwill Net assets Carrying amount 3,000,000 9,000,000 Impairment loss (3,000,000) (2,000,000)  Adjusted carrying amount 7,000,000 There has been a favorable change in the estimate of the recoverable amount of the net assets. The recoverable amount is now P8,000,000 on December 31,2015. The carrying amount of the net assets would have been P7,200,000 on December 31,2015 if there was no impairment loss recognized on December 31,2014. Assets are depreciated at 20% of reducing balance. What gain on reversal of impairment should be recognized in 2015?  A. 0 C. 1,600,000 B. 1,000,000 D. 2,400,000 FA © 2014 Depreciation & impairment loss 27. On January 1, 2010, Waiver Company purchased a machine for P2,000,000 and established an annual straight line depreciation rate of 10%, with no residual value. During 2014 the entity determined that the machine will not be economically useful in the production process after December 31, 2014. The entity estimated that the machine had no residual value on December 31, 2014, and would be disposed of in early 2015 atacostofP50,000. In the income statement for the year ended December 31, 2014, what amount and type of charge should be reported for the machine? FA © 2014 A. B. C. D. Depreciation 0 200,000 200,000 1,200,000 Impairment loss 1,250,000 1,000,000 1,050,000 50,000 Comprehensive Questions 1 & 2 are based on the following information. P1 © 2014 Zambia Company purchased four convenience store buildings on January 1, 2008 for a total of P25,000,000. The buildings have been depreciated using the straight-line method with a 20-year

useful life and 10% residual value. On January 1, 2014, the entity has converted the buildings into a hotel and restaurant. Because of the change in the use of the buildings, the entity is evaluating the buildings for possible impairment. The entity estimated that the buildings have a remaining useful life of 10 years, that their residual value will be zero, that net cash inflows from the buildings will total P1,500,000 per year, and that the current fair value of the four buildings totals PI 0,000,000. The appropriate discount rate is 12%. The present value of an ordinary annuity of 1 at 12% for 10 periods is 5.65.

32. What is the impairment loss for 2014?  A. 0 B. 1,350,000

28. What amount of impairment loss should be recognized for 2014?  A. 0 C. 8,250,000 B. 7,500,000 D. 9,775,000

33. What is the gain on reversal of impairment for 2015?  A. 0 C. 400,000 B. 250,000 D. 800,000

29. What is the depreciation of the buildings for 2014?'  A. 762,750 C. 900,000 B. 847,500 D. 1,000,000

Questions 1 thru 3 are based on the following information. FA © 2014 On January 1, 2014, Elite Company purchased equipment with a cost of P11,000,000, useful life of 10 years and no residual value. The entity used straight line depreciation. At every year-end, the entity determined that impairment indicators are present. There is no change in the useful life or residual value. The following information is available for impairment testing at each year end: December 31, 2014 December 31, 2015 Fair value less cost of disposal 8,100,000 8,400,000 Value in use 8,550,000 8,200,000

Questions 1 & 2 are based on the following information. P1 © 2014 On January 1,2014, Zimbabwe Company has a machinery with cost of P5,000,000 and accumulated depreciation of P1,500,000. The machinery was acquired on January 1, 2011 and had been depreciated using the straight line method with useful life of 10 years and no residual value.On January 1,2014, the entity has properly tested the machinery to be impaired. The machinery has a remaining life of 5 years and is expected to generate undiscounted net cash inflows of P800,000 per year. The fair value of the machinery on January 1,2014 is P3,000,000. The appropriate discount rate is 8%. The present value of an ordinary annuity of 1 at 8% for 5 periods is 3.99. 30. What amount should be recognized as an impairment loss for 2014?  A. 0 C. 500,000 B. 308,000 D. 808,000 31. What is the depreciation of the machinery for 2014?  A. 300,000 C. 600,000 B. 319,200 D. 638,400 Questions 1 & 2 are based on the following information. P1 © 2014 On January 1,2014, Elite Company purchased equipment with cost of P11,000,000, useful life of 10 years and no residual value. The entity used straight line depreciation. On December 31,2014 and December 31,2015, the entity determined that impairment indicators are present. There is no change in the useful life or residual value.

Fair value less cost of disposal Value in use

December 31, 2014 8,100,000 8,550,000

34. What is the impairment loss for 2014?  A. 0 B. 1,350,000

December 31, 2015 8,400,000 8,200,000

C. 1,800,000 D. 2,450,000

C. 1,800,000 D. 2,450,000

35. What is the gain on reversal of impairment for 2015?  A. 0 C. 800,000 B. 400,000 D. 1,200,000 36. What is the depreciation for 2016?  A. 950,000 B. 1,025,000

C. 1,050,000 D. 1,100,000

Multiple Choice – Problems: Cash Generating Unit Impairment loss - goodwill 37. On July 1, 2014, Nicole Company acquired Jones Company in a business combination. As a result of the combination, the following amounts of goodwill were recorded for each of the

three reporting units of the acquired entity: Retailing 300,000 Service 200,000 Financing 400,000 Near the end of 2014, a new major competitor entered the entity's market and the entity was concerned that this might cause a significant decline in the value of goodwill. Accordingly, the entity computed the implied value of the goodwill for the tnree major reporting units on December 31,2014 as follows: Retailing 250,000 Service 100,000 Financing 600,000 What is the amount of i mpairment of goodwill that should be recorded on December 31, 2014?  A. 0 C. 150,000 B. 100,000 D. 250,000 FA © 2014 Impairment loss - allocated 38. Palawan Company has determined that the electronics division is a cash generating unit. The entity calculated the value in use of the division to be P8,000,000. The assets of the cash generating unit at carrying amount are as follows: Building 5,000,000 Equipment 3,000,000 Inventory 2,000,000 10,000,000 The entity has also determined that the fair value less cost of disposal of the building is P4,500,000. What is the impairment loss to be allocated to the equipment?  A. 400,000 C. 900,000 B. 600,000 D. 1,000,000 P1 © 2014 39. One of the cash generating units of Sanmig Company is the production of liquor. On December 31,2014, the entity believed that the assets of the cash generating unit (CGU) are impaired based on an analysis of economic indicators. The assets and liabilities of the cash generating unit at carrying amount on December 31, 2014 are: Cash 4,000,000  Accounts receivable 6,000,000  Allowance for doubtful accounts 1,000,000 Inventory 7,000,000 Property, plant and equipment 22,000,000

 Accumulated depreciation 4,000,000 Goodwill 3,000,000  Accounts payable 2,000,000 Loans payable 1,000,000 The entity determined that the value in use of the cash generating unit isP30,000,000. The accounts receivable are considered collectible, except those considered doubtful. What is the impairment loss to be allocated to property, plant and equipment?  A. 2,400,000 C. 4,000,000 B. 2,880,000 D. 4,200,000 P1 © 2014 40. Brandy Company has two cash generating units. On December 31, 2014, the carrying amounts of the assets of one cash generating unit are: Inventory 200,000  Accounts receivable 300,000 Plant and equipment 6,000,000  Accumulated depreciation 2,600,000 Patent 850,000 Goodwill 100,000 The accounts receivable are regarded as collectible and the fair value less cost of disposal of the inventory is equal to the carrying amount. The patent has a fair value less cost of disposal of P750,000. On December 31,2014, the entity undertook impairment testing of the cash generating unit and determined the value in use of the unit at P4,050,000. What is the impairment loss to be allocated to the plant and equipment?  A. 560,000 C. 700,000 B. 600,000 D. 800,000 P1 © 2014 41. Uranus Company has various cash generating units. On December 31,2014, one cash generating unit has the following carrying amount of assets: Cash 600,000 Inventory 1,400,000 Land 2,500,000 Plant and equipment 9,000,000  Accumulated depreciation 1,500,000) Goodwill 1,000,000 Carrying amount 13,000,000  As part of the impairment testing procedure, the management determined the value in use of the cash generating unit at P8,500,000. The fair value less cost of disposal for the inventory is greater than the carrying amount. What is the impairment loss to be allocated to plant and equipment?

 A. 2,625,000 B. 3,375,000

C. 3,500,000 D. 4,500,000

P1 © 2014

Revised carrying amounts 42. Bronze Company operates a production line which is treated as a cash generating unit for impairment review purposes. On December 31,2014, the carrying amounts of the noncurrent assets are as follows: Goodwill 1,100,000 Machinery 2,200,000 On December 31,2014, the value in use of the production line is estimated at P2,700,000. What are the revised carrying amounts of the goodwill and machinery, respectively?  A. 500,000 and 2,200,000 C. 900,000 and 1,800,000 B. 800,000 and 1,900,000 D. 1,100,000 and 1,600,000 P1 © 2014 Comprehensive Questions 1 & 2 are based on the following information. P1 © 2014  At the beginning of current year, Jolo Company acquired all the assets and liabilities of another entity. The acquiree has a number of operating divisions, including one whose major industry is the manufacture of toy train. The toy train division is regarded as a cash generating unit. In paying P20,000,000 for the net assets of the acquiree, Jolo calculated that it had acquired goodwill of P2,400,000. The goodwill was allocated to each of the divisions, and the assets and liabilities acquired are measured at fair value at acquisition date. At year-end, the carrying amounts of the assets of the toy train division were: Building 2,000,000 Inventory 1,500,000 Trademark 1,000,000 Goodwill 500,000 There is a declining interest in toy train because of the aggressive marketing of computer-based toys. The entity measured the value in use of the toy train division at year-end at P3,600,000. 43. What is the impairment loss on goodwill?  A. 0 B. 140,000

C. 250,000 D. 500,000

On December 31,2014, Zernice Company acquired the following three intangible assets: * A trademark for P3,000,000. The trademark has 4 years remaining in its legal life. It is anticipated that the trademark will be renewed in the future indefinitely. * Goodwill for P500,000. * A customer list for P2,100,000. By contract, the entity has exclusive use of the list for five years. However, it is expected that the list will have an economic life of 3 years. On December 31,2015, before any adjusting entries for the year were made, the following information was assembled: a. Because of a decline in the economy, the trademark is now expected to generate cash flows of just P105,000 per year. b. The cash flow expected to be generated by the cash generating unit to which the goodwill is related is P200,000 per year for the next 20 years. The carrying amounts of the assets and liabilities of the cash generating unit are: Identifiable assets 3,500,000 Goodwill 500,000 Liabilities 1,100,000 It is reliably determined that the cash flows of the cash generating unit cannot be computed without consideration of the liabilities. c. The cash flows expected to be generated by the customer list are P800,060 in 2016 and P500,000 in 2017. d. The appropriate discount rate is 6%. The present value of 1 at 10% is .94 for one period and .89 for two periods. The present value of an ordinary annuity of 1 at 10% for 20 periods is 11.45. 45. What is the impairment loss on trademark?  A. 0 B. 1,250,000

C. 1,750,000 D. 3,000,000

46. What is the impairment loss on goodwill?  A. 0 B. 110,000

C. 500,000 D. 610,000

47. What is the impairment loss on customer list?  A. 0 C. 203,000 B. 178,000 D. 243,000

44. What is the impairment loss to be allocated to the building?  A. 300,000 C. 500,000 B. 400,000 D. 900,000

ANSWER EXPLANATION Questions 1 thru 3 are based on the following information.

P1 © 2014

1.

2.

Answer is (B).  Acquisition cost  Amortization for 2013 & 2014 (5,200,000 / 10 x 2) Carrying amount  – 12/31/2014 Value in use  – higher than fair value Impairment loss Answer is (B). Intangible asset – 1/1/2014  Amortization for 2014 Carrying amount  – 12/31/2014 Value in use Carrying amount Impairment loss

3.

4.

5.

6.

(3,000,000 / 10)

(300,000 x 7.11)

Answer is (B). Cost - January 1,2013  Accumulated depreciation (5,000,000 /10 x 2) Carrying amount - December 31, 2014 Recoverable amount equal to fair value with in-use premise Impairment loss Answer is (B). Carrying amount - January 1, 2014 Depreciation for 2014 (1,600,000/4) Carrying amount - • December 31,2014   Recoverable amount equal to the sale price Impairment loss for 2014 Answer is (C). Cost - January 1,2010  Accumulated depreciation - 12/31/2014 Carrying amount - December 31, 2014 Estimated cost of disposal Impairment loss Answer is (B).

 Annual cash inflows 700,000 Multiply by PV of an ordinary annuity of 1 at 8% for 15 periods 8.56 Value in use 5,992,000 The value in use is the recoverable amount because it is higher than the fair value of P5,300,000. Cost - January 1,2011 10,000,000  Accumulated depreciation – Dec. 31, 2014 (10,000,000/25 x 4) 1,600,000 Carrying amount - December 31, 2014 8,400,000 Recoverable amount 5,992,000 Impairment loss 2,408,000

5,200,000 (1,040,000) 4,160,000 3,800,000 360,000

3,000,000 (300,000) 2,700,000

7.

Answer is (C). Fair value - higher than value in use 4,500,000 Carrying amount 6,000,000 Impairment loss (1,500,000) If the recoverable amount of an asset is lower than the carrying amount, the difference is recognized as an impairment loss. The recoverable amount is equal to the value in use or fair value less cost of disposal, whichever is higher. The impairment is recorded as follows: Impairment loss 1,500,000  Accumulated depreciation 1,500,000

8.

Answer is (B). Cost of equipment 5,000,000  Accumulated depreciation 3,000,000 Carrying amount 2,000,000 Fair value of equipment 1,250,000 Impairment loss 750,000 The net future cash inflows are not used in determining impairment loss because the inflows are undiscounted.

9.

Answer is (B). Cost  Accum. depr’n - January 1, 2014 Carrying amount - January 1,2014 Fair value Impairment loss

2,133,000 2,700,000 (567,000)

5,000,000 (1,000,000) 4,000,000 3,700,000 300,000

2,400,000 400,000 2,000,000 650,000 1,350,000

(200,000 x 5)

2,000,000 1,000,000 1,000,000 50,000 1,050,000

10. Answer is (A). Impairment loss

(2,000,000-100,000/10 x 2.5)

(450,000 – 428,000)

2,000,000 475,000 1,525,000 600,000 925,000

22,000

11. Answer is (B). Offer price Disposal cost Fair value less cost of disposal Value in use Carrying amount of provision  Adjusted value in use Carrying amount of old platform Carrying amount of provision  Adjusted carrying amount Recoverable amount  – equal to fair value less cost of disposal being the higher amount Impairment loss 12. Answer is (D). Trademark Present value of indefinite cash flows (200,000/10%) Impairment loss Patent Present value of cash flows (500,000x3.79) Impairment loss Total impairment loss (4,000,000 + 1,105,000)

8,000,000 (500,000) 7,500,000 12,000,000 (5,000,000) 7,000,000 15,000,000 (5,000,000) 10,000,000 7,500,000 2,500,000

6,000,000 2,000,000 4,000,000 3,000,000 1,895,000 1,105,000 5,105,000

13. Answer is (B). Cost of equipment 5,000,000  Accumulated depreciation 3,000,000 Carrying amount 2,000,000 Fair value of equipment 1,250,000 Impairment loss 750,000 The net future cash inflows are not used in determining impairment loss because the inflows are undiscounted. 14. Answer is (A). Trademark Value in use Impairment loss Patent

(120,000 / 8%)

2,000,000 1,500,000 500,000 6,000,000

 Amortization for 2014 Carrying amount  – 12/31/2014 Value in use Impairment loss

(6,000,000 / 5) (1,000,000 x 3/31)

1,200,000 4,800,000 3,310,000 1,490,000

15. Answer is (B). From August 21. 3011 to May 31, 2014 is a period of 33 months. Thus, the remaining life of the machine is 27 months, 60 months original life minus 33. Depreciation for June 2014 (1,350,000 / 27 months) 50,000 Cost  Accum. depn. – 5/31/2014 (3,200,000 – 500,000) x 33/60 Carrying amount  – 5/31/2014 Fair value less cost of disposal Impairment loss

3,200,000 1,485,000 1,715,000 1,350,000 365,000

16. Answer is (B). Cost – January 1, 2014 8,000,000  Accumulated depreciation (8,000,000 – 500,000) / 10 x 2 (1,500,000) Carrying amount  – December 31, 2015 6,500,000 The recoverable amount is equal to the fair value of P6,600,000 which is higher than the value in use of P6,300,000. Since the recoverable amount is higher than the carrying amount, no impairment loss is recognized. Accordingly, the carrying amount is allocated over the remaining useful life. Depreciation for 2016 (6,500,000 / 5 years remaining) 1,300,000 17. Answer is (C). Cost - January 1, 2013 8,000,000  Accumulated depreciation (8,000,000-500,000)/10 x 2 (1,500,000) Carrying amount - December 31,2014 6,500,000 The recoverable amount is equal to the fair value of P6,600,000 which is higher than the value in use of P6,300,000. Since the recoverable amount is higher than the carrying amount, no impairment loss is recognized. Accordingly, the carrying amount is allocated over the remaining useful life. Depreciation for 2015 (6,500,000 / 8 years remaining) 812,500 18. Answer is (D). Cost  Accumulated depreciation - January 1, 2014 Carrying amount - January 1, 2014

9,000,000 4,200,000 4,800,000

Expected recoverable amount Impairment loss Impairment loss 1,800,000  Accumulated depreciation 1,800,000  Adjusted accum. depr’n, Jan. 1, 2014 (4,200,000 + 1,800,000) Depreciation for 2014 (3,000,000 / 3)  Accumulated depreciation - December 31,2014

3,000,000 1,800,000

6,000,000 1,000,000 7,000,000

19. Answer is (C). Carrying amount 1,600,000 Recoverable amount equal to fair value which is higher than value in use 1,400,000 Impairment loss 200,000 20. Answer is (C). Cost, January 1, 2011  Accumulated depreciation, Dec. 31, 2013 Carrying amount, Dec. 31, 2013 Recoverable amount Impairment loss The loss is recorded as follows: Impairment loss  Accumulated depreciation Cost  Accumulated depreciation Recoverable amount, January 1, 2014 Depreciation for 2014 Carrying amount, December 31, 2014

(100,000 x 3)

800,000 300,000 500,000 200,000 300,000

300,000 300,000

(300,000 + 300,000)

21. Answer is (B). Recoverable amount - January 1, 2014 Depreciation for 2014 (700,000 / 3.5) Carrying amount - December 31,2014 22. Answer is (A). Carrying amount - January 1, 2014 Depreciation for 2014 (1,750,000 - 250,000 / 2) Carrying amount - December 31,2014

(200,000 / 5)

800,000 600,000 200,000 40,000 160,000

700,000 200,000 500,000

1,750,000 750,000 1,000,000

23. Answer is (B). Cost - January 1,2011  Accum. depr’n - August 31, 2014 Carrying amount - August 31,2014 Impairment loss Fair value-August 31,2014

(2,400,000 / 96 months x 44)

2,800,000 1,100,000 1,700,000 ( 200,000) 1,500,000

24. Answer is (A). Carrying amount of cash generating unit 3,300,000 Value in use 2,700,000 Impairment loss 600,000 The impairment loss is applied against the goodwill only. Thus, goodwill has an adjusted balance of P500,000 and the balance of the machinery remains the same at P2,200,000. 25. Answer is (C). Fair value - January 1,2014 Depreciation for 2014 (6,000,000 / 8) Carrying amount - 12/31/2014-with impairment

6,000,000 750,000 5,250,000

Cost - January 1, 2012 10,000,000  Accumulated depreciation - December 31, 2014 (10,000,000/10x3) 3,000,000 Carrying amount - 12/31/2014 - assuming no impairment 7,000,000 Carrying amount — 12/31 /2014 — with impairment 5,250,000 Gain on reversal of impairment 1,750,000 PAS 36, paragraph 117, provides that the fair value cannot exceed the carrying amount assuming there was no impairment. 26. Answer is (C). Carrying amount - December 31, 2014 Depreciation for 2015 (20%) x 7,000,000) Carrying amount - 12/31/2015 with impairment

7,000,000 (1,400,000) 5,600,000

Carrying amount - 12/31/2015 assuming no impairment 7,200,000 Carrying amount - 12/31/2015 with impairment 5,600,000 Gain on reversal of impairment 1,600,000 The recoverable amount of P8,000,000 is ignored because it exceeds the carrying amount of P7,200,000 on December 31,2015 assuming no impairment. 27. Answer is (C).

Depreciation for 2015 Cost – 1/2/2010  Accum. depn. – 12/31/2014 Carrying amount  – 12/31/2014 Estimated cost of disposal Impairment loss

(10% x 2,000,000)

(200,000 x 5)

28. Answer is (C). Fair value Present value of net cash inflows (1,500,000 x 5.65) Buildings  Accumulated depreciation (22,500,000 / 20 x 6) Carrying amount - January 1, 2014 Fair value - higher than value in use Impairment loss 29. Answer is (D).

1,000,000

30. Answer is (B). Fair value Present value of net cash inflows (800,000 x 3.99) Machinery  Accumulated depreciation Carrying amount - January 1,2014 Present value of net cash inflows or value in use - higher Impairment loss

32. Answer is (D). Cost-January 1,2014  Accumulated depreciation Carrying amount - December 31, 2014 Value in use - higher than fair value Impairment loss for 2014 33. Answer is (D). Carrying amount - January 1, 2015

2,000,000 1,000,000 1,000,000 50,000 1,050,000

10,000,000 8,475,000 25,000,000 6,750,000 18,250,000 10,000,000 8,250,000

Depreciation for 2014 (10,000,000 /10)

31. Answer is (D). Depreciation for 2014 (3,192,000 / 5 years)

200,000

3,000,000 3,192,000 5,000,000 1,500.000 3,500,000 3,192,000 308,000

Depreciation for 2015 (8,550,000/9) . ( 950,000) Carrying amount- 12/31/2015 with impairment 7,600,000 Cost - January 1, 2014 11,000,000  Accumulated depreciation – Dec. 31,2015 (11,000,000/10x2) ( 2,200,000) Maximum carrying amount - 12/31/2015 no impairment 8,800,000 Fair value less cost of disposal - 12/31/2015, higher than value in use 8,400,000 Carrying amount - 12/31/2015 with impairment 7,600,000 Gain on reversal of impairment for 2015 800.000 34. Answer is (B). Cost – 1/1/2014  Accum. depn. Carrying amount  – 12/31/2014 Value in use  – higher than fair value Impairment loss for 2014

11,000,000 (11,000,000 / 10) (1,100,000) 9,900,000 8,550,000 1,350,000

35. Answer is (C). Carrying amount  – 1/1/2014 Depreciation for 2015 (8,550,000 / 9) Carrying amount  – 12/31/2015 with impairment

8,550,000 (950,000) 7,600,000

Cost – 1/1/2014 11,000,000  Accum. depn. – 12/31/2015 (11,000,000 / 10 x 2) (2,200,000) Maximum carrying amount  – 12/31/2014 no impairment 8,800,000 Fair value less cost of disposal – 12/31/2015 higher than fair value8,400,000 Carrying amount  – 12/31/2015 with impairment 7,600,000 Gain on reversal of impairment for 2015 800,000

638,400 36. Answer is (C). Depreciation for 2016 11,000.000 (11,000,000 /10) (1,100,000) 9,900,000 8,550,000 1,350,000

8,550,000

(8,400,000 / 8)

1,050,000

37. Answer is (C). Goodwill Implied value Loss Retailing 300,000 250,000 50,000 Service 200,000 100,000 100,000 Financing 400,000 600,000 - . Total impairment loss 150,000 Goodwill impairment is determined at the level of the individual reporting unit and not at the

entity level. Thus, no loss is recognized for the Financing unit because the implied value of goodwill exceeds the carrying amount. 38. Answer is (C). Carrying amount of cash generating unit Value in use Impairment loss

10,000,000 8,000,000 2,000,000

 Allocation of impairment loss Building (5/10x2,000,000) Equipment (3/10x2,000,000) Inventory (2/10x2,000,000)

1,000,000 600,000 400,000 2,000,000 Observe that after allocating the PI,000,000 loss to the building, the carrying amount of the building would be P4,000,000 which is lower than its fair value of P4,500,000. PAS 36, paragraph 105, provides that the carrying amount of an asset shall not be reduced below the highest of fair value less cost of disposal, value in use and zero. The amount of impairment loss that would otherwise have been allocated to the asset shall be reallocated prorata to the other noncash assets of the cash generating unit.  Accordingly, only P500,000 loss is allocated to the building and the balance of P500,000 is reallocated to the equipment and inventory prorata. Building Equipment Inventory  Allocated loss 1,000,000 600,000 400,000 Reallocated loss: ( 500,000) (3/5 x 500,000) 300,000 (2/5x500,000) . 200,000 . Impairment loss 500,000 900,000 600,000 39. Answer is (B). Cash  Accounts receivable - net Inventory Property, plant and equipment - net Goodwill Carrying amount of CGU Value in useImpairment loss Impairment loss allocated to goodwill Remaining impairment loss

4,000,000 5,000,000 7,000,000 18,000,000 3,000,000 37,000,000 30,000,000 7,000,000 3,000,000 4,000,000

Carrying amount Fraction Loss Inventory 7,000,000 7/25 1,120,000 Property, plant and equipment 18,000,000 18/25 2,880,000 25,000,000 4,000,000 The impairment loss is not allocated to the accounts receivable because the accounts are considered collectible except those doubtful. Carrying amount of CGU Observe that the liabilities of the cash generating unit are ignored in determining the carrying amount of the CGU. PAS 36, paragraph 76, provides that the carrying amount of a cash generating unit includes "the carrying amount of only those assets that can be attributed directly or allocated on a reasonable and consistent basis to the cash generating unit" and shall generate the future cash inflows used in determining the value in use of the cash generating unit Paragraph 76 further provides that the carrying amount of the cash generating unit does not include the carrying amount of any recognized liability, unless the recoverable amount of the cash generating unit cannot be determined without consideration of this liability. The reason is stated in PAS 36, paragraph 43, which mandates that to avoid double counting, estimates of future cash flows do not include cash outflows that relate to obligations that have been recognized as liabilities by the cash generating unit. 40. Answer is (B). Inventory  Accounts receivable Plant and equipment (6,000,000-2,600,000) Patent Goodwill Carrying amount of CGU Value in use Impairment loss Impairment loss allocated to goodwill Remaining impairment loss

200,000 300,000 3,400,000 850,000 100,000 4,850,000 4,050,000 800,000 100,000 700,000

Plant

Patent

 Allocated loss (3,400 / 4,250 x 700,000) ( 850/4,250 x 700,000) Reallocated loss

560,000

140,000 40,000 ( 40,000) 600,000 100,000 The patent shall not be reduced to an amount below the fair value less cost of disposal of

P750,000. No impairment loss is allocated to accounts receivable and inventory because the accounts are considered collectible and the fair value less cost of disposal of the inventory is equal to the carrying amount. 41. Answer is (A). Carrying amount of CGU 13,000,000 Value in use 8,500,000 Impairment loss 4,500,000 Impairment loss allocated to goodwill 1,000,000 Remaining impairment loss 3,500,000 Carrying amount Fraction Loss Land 2,500,000 25/100 875,000 Plant and equipment 7,500,000 75/100 2,625,000 10,000,000 3,500,000 No impairment loss is allocated to inventory because the fair value less cost of disposal of inventory is higher than carrying amount. 42. Answer is (A). Carrying amount of cash generating unit 3,300,000 Value in use 2,700,000 Impairment loss 600,000 The impairment loss is applied against the goodwill only. Thus, goodwill has an adjusted balance of P500,000 and the balance of the machinery remains the same at P2,200,000. 43. Answer is (D). Carrying amount of cash generating unit 5,000,000 Value in use 3,600,000 Impairment loss 1,400,000 Impairment loss allocated to goodwill 500,000 Remaining impairment loss 900,000 The carrying amount of goodwill is fully recognized as impairment loss. PAS 36, paragraph 104, provides that when an impairment loss is recognized for a cash generating unit, the loss is allocated to the assets of the unit in the following order: a. First, to the goodwill, if any. b. Then, to all other noncash assets of the unit prorata based on their carrying amount. 44. Answer is (B). Building

Carrying amount 2,000,000

Fraction 20/45

Loss 400,000

Inventory Trademark

1,500,000 15/45 300,000 1,000,000 10/45 200,000 4,500,000 900,000 The remaining loss of P900,000 is allocated to the assets other than goodwill based on carrying amount. 45. Answer is (B). Trademark PV of cash flows (105,000/6%) Impairment loss on trademark

3,000,000 1,750,000 1,250,000

46. Answer is (C). Carrying amount of net assets (4,000,000 -1,100,000) PV of cash flows (200,000 x 11.45) Impairment loss on CGU Impairment loss on goodwill Impairment loss on other assets

2,900,000 2,290,000 610,000 (500,000) 110,000

47. Answer is (C). Customer list-January 1, 2015  Amortization for 2015 (2,100,000/3) Carrying amount - December 31, 2015 PV of cash flows (800,000 x .94 + 500,000 x .89) Impairment loss on customer list

2,100,000 ( 700,000) 1,400,000 1,197,000 203,000