- CHAPTER 53 \ypAIRMENT OF ASSET individual asset problem 3-1 (AICPA Adana end, Zee Company has an equipment with the following cost scumulated depreciation: 9,000,000 3,000,000 equipment et EquiP lated depreciation accumula pue to obsolescence and physical damage, the equipment is found to be impaired. : atyear-end, the entity has determined the following information related tothe equipment: Fair value less cost of disposal 3 4.500.000 Value in use oF discounted net cash inflows 4,000,000 Undiscounted net cash inflows 5,500,000 What amount should be reported as impairment loss for the year? - - a 1.500,000 b. 2.000.000 c. 500,000 d . 400.000 Solution 53-1 Answer a Fair value - higher than value in use 4.500.000 Carrying amount 6,000,000 Impairment loss (1,500,000) i the recoverable amount of an asset is lower than the carrying mount. the difference is recognized as an impairment loss. The undis i counted net cash inflows are ignored i ini recoverable amount. ows are ignored in determining the The recoverable : ae al at ape amount is equal to the value in use or fair value isposal, whichever is higher. 'mpairm cnt loss, cumulated depreciation 1.500.000 661Problem 53-2 (AICPA Adapted) Silver Company had an equipment with carrying at year-end: . Expected discounted net cash flows, P : Fair value of similar asset Fair value of the asset when sold Star) ‘d-alone 4 hat amount should be reported ag im 4“ Wi Pee a eg ; a. 500,000 b. 350.000 ") c. 220,000 is d. 0 Solution 53-2 Answer c Car ying amount Recoverabte amount equal to fair y; ssumi asset is sold Stand-alone which is higher ng discounted net cash flows than Impairment loss Problem 53-3 (AICPA Adapted) ee Ball Company determined as Tesult ofg had been a si nificant change in the m; plant going to be used in Manufacturing Process. Expected future cash inflows from us Expected future cash outflows from Expected future u lure cash proceeds from at the disposal dated) CPA Adapte' 53-6 (Al jem - rob 1, Reed Company purchaseg = january | 2meablished an annual depreciati. y ly 74,000.00 one an eight-year life, p1,000. v4, after issuing the 2023 financial statem puring . that the machine suffered Permanent in concluded th a reasonable estimate of the amount 2,000 pata use of the machine for the per hrough December 31, 2028 or 5 years, 2024 thr ue amount should be reported as impairment 1. _ 3,000,000 ‘, 4,000,000 c. 2,000,000 4. 0 2. Whatisthe carrying amount of the 4,000,000 1,000,000 1.600.000 0 machine ; aogcp Solution 53-6 Question 1 Answer a Cost ~ January 1, 2021 a Accumulated depreciation — December 31 (1,000,000 x3) a Carrying amount — De cember 31, 2023 Recoverable amount ~ December 31, 202: Impairment loss for 2023 Question 2 Answer c Recoverable a «© amount — Janua Preciation for 2024 (2,000,¢ Carrying amount ~ Decem| Jj Yi, MM pp nee ye,iG 3-4(Al : ment on January 1, 2022 for 9° p- spay acquire aN in -year useful life and no residual jo" goo. The eu. mn, the following information was obtained: rn pece! embe: 4 cash flows 3,600,000 re On “ * undiseouniee premise 3,700,000 egret esti | te vid in-exchange premise 3,500,000 pe el a uld be recognized as impairment loss for 2023? unt sho W } mf "000 4 a 0,008 b 500,00 a 53-4 Answer a pen oe 5,000,000 Ge sted iated Denes (5,000,000/ 10x 2) ONO) acum — December 31, 2023 4,000,000 _ yin le ae il to fair value with in-use premise 3,700,000 Reco’ 300, jmpairment loss 300,000 problem 53~ 5 (AICPA Adapted) - Company determined that there had baat? oe of an equipment used in t Original cost of equipment Accumulated depreciation Expected undiscounted net future Fair value of equipment What amount of impairment loss shou a 3,250,000 5. 3:750,000 «7502000 4 250,000 Solution 53-5 Answer ¢ Cost of e ‘quipment Accumuldte’ depreciation 8 a mount Ye of equipment 'mpairment | ieee 4) nal undiscounteg netProblem 53-8 (AICPA. Adaptegy ary 2022, Winn Company ' Ps 000000. The equipment had an est ui at Pl 000,000, an estimated 8-ye r Usefiy} i p Ment # depreciated by the straight line Method, €, R 's later, it became apparent that th; ; pee impairment of valttad his equi January 2024, Management short be only P1759 and the residual val, determ; 3000 with a 95 Med the ue should be Teduceg to \. What amount shuuld be Tecognj 2023? 2. 4,000,000 >. 3,250,000 ©. 2,250,000 d. 0 On December Sl, 2024, equip nent? ‘ 3, 3.590 JG) 1,750,000 ©. 1,500,000 de -000.000 Ze nN Solution 53-8 Question | Answer ¢ Cost ~ January 1, 2022 Accumula.ed d €preciation -. Dece (5,000,009 — 1 000,000 x2) Carrying mount — December 31 > 2023 — Fair Value — December 31.2023 Impairment loss for 2023 Question 2 Answer dad Carrying “mount ~ January 1, 20240 “Preciation for 2024 »750,000 - Carrying amount — December 31,—_— : 1, due to obsolescence, equipment , ¥ 00,000 and accumulated depreciation gei iginal cost pa 00,000 had suffered permanent panne y,2023)° {should have a carrying amount of € : nt, and ¥ the beginning of the year. seful life of the equipment was c sail e remaining u é al from 8 years to 3. 31.2033) 8a amount should be reported as f r. : embe 202 pleted depreciation? 508 7 1,000,000 b. 5,200,000 ; 6,000.000 i. 7,000.000 Solution 53-7 Answer d Cost ey accumulated depreciation — Carrying amount — January 1, 2023 Expected recoverable amount January 1, 2023 Impairment loss Journal entry Impairment loss Accumulated depreciation pepnatcd depreciation — January 1, adjustment for the impairment loss Adjusted accumu “Prciation for 2, Accumulated a %I - 3-9 (A Company purchased a machine for prove ‘ivi 201 3 nek annual straight line depreciation rate janve- desta’ is lu an z e. P ea th are ihe, i he machine will not be of 10% * atity determined that the macht purine 2023. tte production process after December 31,2023. ically U ‘ eon ly mated that the machine had no residual value on the id 1.2023 and would be disposed of in early 2024 at a em P ecto Id be reported for the machi what amount of impairment loss shou! repo! € machine 39 for 2023° 4, 1,250.000 z. 1.000,000 «. 1,050.000 4 50.000 Solution 53-9 Answer c Cost - January 1, 2019 Accumulated depreciation — 12/31/2023 (20! Carrying amount —- December 31, 2023 acne I i” Estimated cost of disposal ae impairment loss for 2023 Via Fie My The carrying amount plus the estimated cost of Ct as impairment loss for 2023 bi ©nger be economically useful mber 31, 2023, SaleProblem 53-10 (AICPA Adapteq) ; } had purchas : Scarbrough Company ) fi his a January 1, 2020. The Sduipment had oe value of P800,000. The entity depreciated ae straight line method, In August 2023, the entit «ty questioned the re¢ carrying amount of this €quipment, “es On August 31, 2023, the discounteg exeee inflows related to the Contin ued y, equipment amounted to P. s 3,500,000, on same date is P3,000,000 S carrying amount of the €quipment?- a. 3,500,000 b. 3,400,000 ¢. 3,000,000 d. 2,600,000 Solution 53-10 Answer b Cost — January 1, 2020 . % Accumulated depreciation—Ay ust 31, (4.800.000 196 months x 44) Carrying amount ~ August 31, 2023 : Useful life (8 years x 12 months) Value in use Fair value “Coverable amount The Cquipment should be P3.400, 000 on DecemberProblem 53-13 (AICPA Adapted) Marjorie € ompany ac Acquired a machin 31, 2020. The machine had a 5-year life ter 3:200.000 on a and was depreciated ugj 4 On May 31, 2023, expected net futur continued use and P1,500.000. The f Is 635,500 365,000 500,000 . 215,000 ae oP a. 63.520 b. 50,000 c. 45,000 d. 31,480 Solution 53-13 Question | Answer b Cost — August 31, 2020 Impairment loss Question 2 Answer b What amo tofi . 5 310d ; us of impairment loss should be Tecognized on What amount should be recorded as di Accumulated depreciation — May 31, 2023 (3,200,000 — 500,000 x 33/60) Carrying amount — May 31, 2023 Recoverable amount equal to fair value COVerabi ‘ed cash osal of the machine a ‘ame date was P1359 ng the straight line bade residual vat 4 test for re © undiscount €ventual disp t tatr value on s residual value, ethod., ility reveateg inflows Telated oh Mounted ig 000 with ng May epreciation for June 20239 3,200,000 cA Ae 3 is a period of 33 months From August 31, 2020 to May 31, 2023 is a period o' Aa Thus. the remaining life of the machine is 27 months, original life minus 33. Depreciation for the month of June 2023 (1.350,000 /27 months) i 670PA Adapted) a shased Co! puter equipment at a poten 020, Rey COMPANY PVT ci yent life with no residual mn Jol 3,600,000 el by the straight line. ee a sptity determined that this equipment had 202+, Ly and that P700,000 could be recovered elite of the equipment. the equipment on December 31, 20237 53-11 (AIC at st 0 os value am ary 152 january Ce pat manently * the remaining U i carrying amount of the carrying 700.000 . 0 eS tion 33-11 Answer b Solution - e % “ t — January 1, 2023 yas 700,000 Recovere eh for 2023 (700,000 / 3.5 years remaining) 200,000 Depreci ¥ as © o amount — December 31. 2023 500,000 Carrying —— problem 53-12 (AICPA Adapted) Oa January 1. 2023, 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 2023, the entity determined that the machine suffered ermanent impairment and will not be economically useful after December 31. 2023. The entity sold the machine for P650.000 on January 5, 2024. What amount should be recognized as impairment loss in 2023? a. 2.000.000 b. 1.750.000 ¢. 1.350.000 d. 0 Solution 53-12 Answer c Carrying amount ga ~ January 1, 20 Depreciation for 2023 (1.600 Gon as “0.00 Carryin : 2.000.000 gam _ 5 *oVerable amount 31, 2023 #000000 Tee nt equal to the sale price $50,000) ent loss for 2023 Bead 669Problem 53-15 (IAA) At year-end, Visayas Company showed the following intangible assets: 6,000,000 Trademark 3,000,000 Patent The trademark has 8 years remaining in the legal life. However, itis ed in the future, anticipated that the trademark will be routinely renew 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 yeat. The appropriate discount rate is 10%. Mathematically, the discounted value ofa 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. Itis expected that h flows of P500,000 per year. the patent will generate cas The appropriate discount rate is also 10%. The present value of an ordinary annuity of | at 10% for 5 periods is 319. What total amount should be recognized as impairment loss for the ear? . 1,105,000 b 5,105,000 c. 4,000,000 d. oe Solution 53-15 Answer b Trademark Present value of indefinite cash flows (200,000/10%) Impairment loss Patent Present value of cash flows (500,000 x 3.79) Impairment loss Total impairment loss (4,000,000 + 1,105,000) . 672- »roblem 53-14 (IAA) abla Ne { four convenience store buildings on P25,000,000. The buildings have been nethod with a 20-year useful life and ompany purchasec al 2017 fora total of sciated using the straight-line r 2023, the entity conver ted the buildings into a hotel and atid change in the use of the buildings, the entity ating the for possible impairment. jated that the buildings have a remaining useful life of 10 al value. The undiscounted net cash inflows t to 1,500,000 per year and the current fair buildings isP1 0,000,000. sonary yp January,» ; zecause of the buildings ty esti with zero residu e buildings amoun of the four : propriate discount rate is 12%. The present value of an ordinary Fy of | at 12% for 10 periods is 9-6. What amount ofimpairment Joss should be recognized for 2023? a 8,250,000 b. 9,775,000 e 7,500,000 d. 0 9, What amount should be recorded as depreciation for 2023? a. 1,000,000 . b: “500,000 ce 847,500 4 762s Solution 53-14 Question I Answer @ “ i Fair value 5.65 os! Present value of net cash inflows (1,500,000 x 5.65) Ss 10 Buildings 75000 Accumulated depreciation (22,500,000 / 20 x6) 73.250,000 Carrying amount ~ Januar, 1, 2023 coe Frdlie = higher aad in use 10,000,000 Impairment loss Question 2 Answer a Depreciation for 2023 (1 0,000,000 / 10) 671Solution 54-1 Question | Answer c Carrying amount of cash generating unit 5,000,000 3,600,000 Value in use 1,400.000 Impairment loss Impairment loss allocated to goodwill 500,000 900,000 Zs = Remaining impairment loss The carrying amount of goodwill is fully recognized as impairment loss. impairment loss is that when an located to the assets PAS 36. paragraph 104, provides t, the loss is al recognized fora cash generating uni of the unit in the following order: ifany. First, to the goodwill, assets of the unit prorata based on their a. b. Then, to all other noncash carrying amount. westion 2 Answer a Carrying amount Fraction . Loss 2,000.000 20/45 400,000 1 500.000 15/45 300,000 1 000,000 10/45 200,000 4,500,000 a aining loss of P900,000 is allocated to the will based on carrying amount. 674CHAPTER 54 [MPAIRMENT OF ASSET Cash generating unit roblem 54-1 (IFRS) the beginning of current ‘abilities of another enti P year. Jolo Company acquired all the assets Q ty. The acquiree has a number of operating ions. including one whose major industry is the manufacture of to The toy train division is regarded as a cash generating unit. : 0.000.000 for the net assets of the acquire, Jolo Company tithad acquired goodwill of P2,400,000. The goodwill h of the divisions, and the assets and liabilities dat fair value at acquisition date. At year-end. ssets of the toy train division were: In paying P2 calculated tha was allocated to eac acquired are measure the carrying amounts of the a Building 2,000.000 Inventory 1,500,000 Trademark 1,000,000 Goodwill 500,000 use of the aggressive There is a declining interest in toy train beca marketing of computer-based toys. The entity measured the value in use of the toy at P3,600,000. ; 1. What amount should be recognized as impairment loss on goodwill? a. 140,000 b. 250,000 ce. 500.000 d. 0 2. What amount should be recognized as impairment loss Lae’ allocated to the building? 400,000 500.000 900,000 300.000 train division at year-end peop 673problem 54-2 (IAA) as four cash generating units. One CGU has been serienci ; loss s in prior years. Thus. it becomes necessary to nine an impairment for the cash generating unit. The assets oft ing amount at the current year-end are: e 4 ‘company h yuzon Gi any | ing significant et de GU ateatty 10,000,000 receivable 20,000,000 ry , 30,000,000 , plant and equipment, net 50,000,000 5,000,000 determined that the value in use of the cash generating unit at the -end is P100,000,000. eal What amount should be recognized.as impairment loss on inventory? a. 5.000,000 », 2,000,000 c, 3,000,000 : 0 Solution 54-2 Answer c Carrying amount of assets 115,000,000 Value in use 100,000,000 Impairment loss 15,000,000 Allocated to goodwill (5,000,000) Remaining impairment loss © 3 10,000,000 Carrying amount Fraction Loss Accounts receivable 20,000,000 2/10 2,000,000 rae, 30,000,000 3/10 3,000,000 roperty, plant and equipment _ 50,000,000 5/10 5,000,000 The remaining impairment loss after the loss on. goodwill is allocated to ased on carrying, amount. the other noncash assets on a prorata basis 675Problem 54-3 (IFRS) ir ¢ ich is treated as Bronze Company operates a production line which 1s tr io generating unit for impairment review oe an i amounts of the noncurrent assets are 4° foley 1,100,000 Goodwill 2,200,000 Machinery : P27 The value in use of the production line is estimated at P2,700,000 at this time. i oF 1. Whatis the revised carrying amount of goodwill _ ofimpairment? a. 500,000 b. 900,000 c. 800,000 d. 600,000 2. What is the revised carrying amount of machinery after recognition of impairment? a. 2,200,000 b. 1,800,000 c. 1,600,000 d. 1,900,000 ‘olution 54-3 estion | Answer a arrying amount of cash generating unit 3,300,000 Value in use 2,700,000 Impairment loss 600,000 Goodwill y : 1,100,000 Impairment loss applied against goodwill only € 600,000) Adjusted carrying amount 500,000 \ ee Question 2 Answer a The machinery is not impaired. The carrying amount remains at P2,200,000. 676Solution 54-4 Question 1 Answer a uestion 3 Answi Question 2 Answre b ‘ ae Question 4 Answer ¢ Carrying amou int of cash ge i i Valeiin Wie h generating unit iran Impairme | p: nt loss 5,000,000 Allocation of impairment loss Building (8/16 x 5,000,000) 2,500,000 Equipment (4/16 x 5,000.000) 1,250,000 Inventory (4/16 x 5,000,000) 1,050,000 5,000,000 Observe that after allocating the P2,500,000 loss to the building, the carrying amount of the building would be P5,500,000 which is lower than its fair value of P6,500,000. _ PAS 36, paragraph 105, provides that the carrying amount of in asset shall not be reduced below the highest of fair value cost of disposal, value in use and zero. mount of impairment loss that would otherwise have been ocated to the asset shall be reallocated prorata to the other assets of the cash generating unit based on carrying amount. Accordingly, only P1 (500,000 Joss is allocated to the building and the balance of P1,000.000 is reallocated to the equipment and im prorata based on carrying amount. ; Inventory Building Equipment Allocated loss 2,500,000 1,250,000 a Reallocated loss: (500,000) (4/8 x. 1,000,000) 500,000 (4/8 x 1,000,000) _ Impairment loss 500,000 1,150,000 _ 500,000 Lo 678problem 54-4 (IFRS) 4indoro Company determined that the electronics division is a cash mine enerating unit, The entity calculated the value in use of the division to p11,000, 000. ype assets of the cash generating unit at carrying amount are: The assets 8,000,000 4,000,000 4,000,000 16,000,000 The entity also determined the fair value less cost of disposal of the building at P6,500,000. What amount should be reported as total impairment loss? 5,000,000 4,000,000 3,000,000 2,000.000 aogcp 2, What amount of impairment loss should be allocated to building? 2,500.000 1,500,000 1,000,000 0 poop What amount of impairment loss should be allocated to equipment? a. 1,250,000 b. 1.500.000 ¢. 1,750,000 d. 0 What amount of impairment loss should be allocated to inventory? a 1,250,000 >. 1.500.000 “ 1.750.000 : 0 677Po problem 54-5 (IAA) agthe beginning of current year, Revlon Company acquired all of the outstanding ordinary shares ofan acquiree for P44,000.000. The fair value of the acquiree S identifiable tangible and intangible assets totaled 50,000.00 and the fair value of liabilities assumed by the acquirer was 00,000. The acquirer performed the required goodwill pean p1s.0 ; estat yeat end. Management provided the following data: air value of acquiree’s net assets including goodwill 37,000,000 carrying amount of acquiree’s net assets including ih goodwill f 41,000,000 What amount of goodwill should be reported at year-end after recognizing any impairment loss? . 9,000,000 4,000,000 5,000,000 0 Pp aes Solution 54-5 Answer c Fair value of acquiree’s net assets including goodwill 37,000,000 : Carrying amount of acquiree’s net assets, including goodwill 41,000,000 Impairment loss 4,000,000 ce value of acquiree’s identifiable assets 50,000,000 ait value of acquiree’s liabilities i 15,000,000 Fai : ' hte of acquiree’s net assets 35,000,000 4 Sition cost 44,000,000 Oodwill ma 9,000,000 eu nt loss — all charged against goodwill ( 4,000,000) 'Ng amount of goodwill 5,000,000 a 679* Problem 54-6 (LFIRS) reporting units for impairment of goody) Divine Company is testing two Telecommunication Ne: tworking Segment carrying amount asi 0 including goodwill sl 00 A 240000 Carrying amount of goodw! Estimated total fair value of sare 2,900,000, 2,800,009 alue e Estimated total fair value of segm > 100,080 am other than goodwill adjusting the goodwill for impairment, what is the : er : Bes rele an t of goodwill for the reporting unit adjusted amoun telecommunication? a, 400,000 b. 800,000 c, 500,000 d. 0 2. After properly adjusting the goodwill for impairment, what is the adjusted amount of goodwill for the reporting unit networking? a. 500,000 b. 200,000 c. 300,000 d. 0 Solution 54-6 Question 1 Answer c Segment carrying amount ~ Telecommunication Estimated total fair value of segment No impairment loss Question 2 Answer c Segment carrying amount ~ Netw: J - orkin Estimated total Jair value of segment ; Impairment loss — applied to goodwill only Goodwill ~ Networking (500,000 ~ 200,000) 680Problem 54-8 (IFRS) One of the cash generati i i : Ing units of Mindanao Company ig ‘ of liquor, The entity believed that the assets of the re fr Pott, (CGU) are Impaired based on an analysis of economic indicat 8. The assets and liabilities of the cash generating unit at ¢ ar m at year-end are: ven Cash Accounts receivable Song Allowance for doubtful accounts T0090 Inventory T0009 Property, plant and equipment 22,000 ogg Accumulated depreciation 4,000,009 Goodwill 3,000,009 The entity determined the value in use of the cash enerating unit a P30,000,000. The accounts receivable are considered collectible, except those considered doubtful. 1. What amount of impairment loss should be allocated to goodwill? a. 3.000,000 b. 1.500.000 c. 2.000,000 d. 0 2. What amount of impairment. loss should be allocated to inventory? ; a. 3.500.000, b. 1,000,000 c. 1.120.000 ‘ d. 0 Res What amount of impairment loss should be allocated t0 plant and equipment? a. 4,000,000 2,880,000 2,400,000 4.200.000 aoe 682