IMPAIRMENT OF ASSET
5. Explain the meaning of "fair value less cost of disposal".
Essay Questions
1. What is the meaning of "impairment of asset"?
Impairment of asset is a fall in the market value of an asset so that its recoverable amount is
now less than its carrying amount in the statement of financial position.
2. What are the external sources that would indicate impairment of an asset?
a. Significant decrease or decline in the market value of the asset.
b. Significant change in the technological, market, legal or economic environment of the
business in which the asset is employed.
c. An increase in the interest rate or market rate of return on investment which will likely
affect the discount rate used in calculating the value in use.
d. The carrying amount of net assets of the entity is more than the "market capitalization".
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 sources that would indicate impairment of an asset?
a. Evidence of obsolescence or physical damage of an asset.
b. Significant change in the manner or extent in which the asset is used with an adverse
effect on the entity.
c. Evidence that the economic performance of an asset will be worse than expected.
For example, the undiscounted net cash flows from the asset are significantly below the
amount budgeted.
4. What is the "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.
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".
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 for identical assets.
2. Level 2 inputs are inputs that are observable either directly or indirectly. Level 2 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 inputs for the asset that are usually 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.
7. Define active market, principal market and market participants.
An active market is a market in which transactions for the asset or liability take place with
sufficient regularity and volume to provide pricing information on an ongoing basis. A
principal market is the market with the greatest volume and level of activity for the asset or
liability.
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.
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 rate is
applied in determining the present value.
The following guidelines are used in determining value in use:
a. Cash flow projections shall be based on reasonable and supportable assumptions.
b. Cash flow projections shall be based on the most recent budgets on financial forecasts,
usually up to a maximum period of 5 years, unless a longer period can be justified.
c. Cash flow projections beyond the 5-year 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 of determining value
in use?
Estimates of future cash flows include:
a. Projections of cash inflows from the continuing use of the asset.
b. Projections of cash outflows necessarily incurred to generate the cash inflows from the
continuing use of the asset.
c. Net cash flows received or paid on the disposal of the asset at the end of its useful life in
an arm's length transaction.
10. What cash flows are excluded in determining value in use?
In determining value in use, estimates of future cash flows exclude the following:
a. Future cash flows relating to restructuring to which the entity is not yet committed.
b. Future costs of improving or enhancing the asset's performance.
c. Cash inflows or outflows from financing activities.
d. Income tax receipts or payments.
11. How is the impairment loss 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 an impairment 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 generating 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, 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 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 positive cash flows. However, there are some departments or
product lines that are significantly unprofitable and cash drains. If aggregation is done at the
"entity level", there would be no impairment to be 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 of an impairment loss of a cash 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 to the cash generating unit.
b. Then, to all other noncash assets of the cash generating unit prorata based on carrying
amount.
Paragraph 105 further provides that the carrying amount of an asset shall not be reduced
below the highest of fair value less cost to sell, value in 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.
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, including 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 that a corporate asset may be 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.
17. Explain the reversal of an impairment loss.
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.
Multiple Choice - Theory A. Corporate assets C. Group
B. Property, plant and equipment D. Cash generating unit FA © 2014
Basic concepts
1. The impairment rules for long-lived assets apply to all of the following, except 7. Which of the following statements is incorrect concerning corporate assets?
A. Land A. Essentially, corporate assets generate cash inflows independently from other assets.
B. Financial instrument B. Corporate assets are group or divisional assets such as I head office building, EDP,
C. Building currently used in business equipment or a research center.
D. Minicomputer used to run a production process FA © 2014 C. The recoverable amount of an individual corporate asset I cannot be determined unless
management has decided I to dispose of the asset.
2. It is a fall in the market value of an asset so that the recoverable amount is now less than the D. If there is an indication that a corporate asset may be I impaired, the recoverable amount
carrying amount in the statement of financial position. of the cash generating! unit to which the corporate asset belongs is determined and
A. Amortization C. Depreciation compared with the carrying amount of the cash generating unit. FA © 2014
B. Decline in value D. Impairment TOA © 2013
Impairment testing
3. What is impairment of asset? 8. Long-lived assets are required to be reviewed for impairment
A. A change in the estimated useful life of an asset. A. When the asset is fully depreciated.
B. An allocation of cost over the useful life of an asset. B. Every year at the end of reporting period.
C. A decline in value of an asset so that the recoverable amount is more than carrying C. Every three years at the end of reporting period.
amount. D. When circumstances indicate that the carrying amount of an asset might not be
D. A fall in the market value of an asset so that the recoverable amount is less than carrying recoverable. FA © 2014
amount. FA © 2014
9. When impairment testing a cash generating unit, any corporate assets shall
4. It is the smallest identifiable group of assets that generate cash inflows from continuing use A. Be separately impairment tested.
that are largely independent of the cash inflows from other assets or group of assets. B. Not be allocated to cash generating units.
A. Cash generating unit C. Goodwill C. Be allocated on a reasonable and consistent basis.
B. Corporate asset D. The entity as a whole TOA © 2013 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 10. The internal sources of information indicating possible impairment include all of the following,
independent of the cash flows from other group of assets. except
B. The group of assets that generate cash inflows from continuing use that are not A. Significant decrease in the market value of the asset.
independent of the cash flows from other group of assets. B. Evidence of obsolescence or physical damage of an asset.
C. The largest group of assets that generate cash inflows from continuing use that are C. Evidence that the economic performance of an asset will be worse than expected.
largely independent of the cash flows from other group of assets. D. Significant change in the manner or extent in which the asset is used with an adverse
D. The smallest group of assets that generate cash inflows from continuing use that are effect on the entity. TOA © 2013
largely independent of the cash inflows from other group of assets. FA © 2014
11. The internal sources of information indicating possible impairment include all of the following, C. Opening retained earnings
except D. Revaluation surplus that relates to the revalued asset FA © 2014
A. Obsolescence or physical damage of an asset.
B. Significant decrease in the market value of the asset. Measurement
C. Evidence that the economic performance of an asset will be worse than expected. 16. An entity shall test an intangible asset with indefinite useful life or an intangible asset not yet
D. Significant change in the manner or extent in which the asset is used with an adverse available for use, or goodwill acquired in business combination for impairment
effect on the entity. FA © 2014 A. Annually C. On acquisition of subsidiary FA © 2014
B. Every 5 years D. If there is an indication of impairment
12. The external sources of information indicating possible impairment include all of the following,
except 17. What is the recoverable amount of an asset?
A. Significant decrease in budgeted net cash flows flowing from the asset. A. Value in use
B. The carrying amount of the net assets of the entity is more than the market capitalization. B. Fair value less cost of disposal
C. Significant change in the technological, market, legal or economic environment of the C. Fair value less cost of disposal or value in use, whichever is lower
business in which the asset is employed. D. Fair value less cost of disposal or value in use, whichever is higher FA © 2014
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 18. What is fair value of an asset?
A. The discounted value of future cash flows expected to be derived from the asset.
13. When an entity is considering whether to apply an impairment test to an individual asset or to B. The undiscounted value of future cash flows expected to be derived from an asset.
the cash generating unit to which that asset belongs, which of the following statements is C. The price that would be received to sell an asset in an orderly transaction between
true? market participants at the measurement date.
I. If the individual asset does not generate cash inflows that are largely independent of D. The price that would be paid to transfer a liability in an orderly transaction between
those from other assets, the cash generating unit shall be identified. market participants at the measurement date. FA © 2014
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. 19. Fair value is defined as
A. I only C. Both I and II I. The price that would be received to sell an asset or paid to transfer a liability in an
B. II only D. Neither I nor II TOA © 2013 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
Recognition an asset and from the disposal at the end of the useful life.
14. Which of the following statements is true is relation to recognition of impairment? A. I only C. Both I and II
I. An impairment loss shall be recognized in profit or loss immediately. B. II only D. Neither I nor II TOA © 2013
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 20. What is the best evidence of fair value?
systematic basis over the remaining useful life. A. Quoted price in an active market for similar asset.
A. I only C. Both I and II B. Quoted price in an inactive market for similar asset.
B. II only D. Neither I nor II TOA © 2013 C. Quoted price in an active market for identical asset.
D. Quoted price in an inactive market for identical asset. FA © 2014
15. An impairment loss that relates to an asset that has been revalued shall be recognized in
A. Profit or loss 21. An active market is
B. Any reserve in equity 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. C. Risk specific to the asset for which future cash flow estimate has been adjusted.
II. The market with the greatest volume and level of activity for the asset or liability. D. Risk specific to the asset for which future cash flow estimate has not been adjusted.
A. I only C. Both I and II
B. II only D. Neither I nor II FA © 2014 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.
22. Costs of disposal include all of the following, except B. Future cash flows shall be based on reasonable and supportable assumptions.
A. Cost of removing the asset C. Legal cost FA © 2014 C. The discount rate used in estimating future cash flows shall be the current rate after tax.
B. Finance cost D. Stamp and similar transaction 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
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. 29. Which of the following is not relevant in determining value in use?
B. The amount of cash or cash equivalents that could currently be obtained by selling an A. The time value of money.
asset in an orderly disposal. B. The carrying amount of the asset.
C. The amount at which an asset could be exchanged between knowledgeable and willing C. The expected future cash flows from the asset. FA © 2014
parties in an arm's length transaction. D. Expectation about possible variation in the amount and timing of future cash flows.
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 30. Which of the following terms best describes the higher of fair value less cost of disposal and
value in use?
24. Value in use of an asset is equal to A. Carrying amount C. Recoverable amount
A. Discounted future net cash flows from the use of the asset B. Depreciable amount D. Revalued amount FA © 2014
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 31. If the fair value less cost of disposal cannot, be determined
D. Undiscounted future net cash flows from the use and eventual disposition of the asset A. The asset is not impaired.
B. The net realizable value is used.
25. Estimates of future cash flows normally would cover projections over a maximum of C. The recoverable amount is the value in use.
A. Five years C. Fifteen years D. The carrying amount of the asset remains the same. FA © 2014
B. Ten years D. Twenty years FA © 2014
32. If the assets are to be disposed of
26. The estimates of future cash flows in calculating value in use include all of the following, A. The asset is not impaired.
except B. The recoverable amount is the value in use.
A. Cash inflows from the continuing use of the asset C. The recoverable amount is the carrying value.
B. Future cost of improving or enhancing the asset's performance D. The recoverable amount is the fair value less cost of disposal. FA © 2014
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 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.
27. When deciding on the discount rate in determining value in use, which factor should not be B. Across the assets of the unit based on carrying amount.
taken into account? C. First, to any goodwill, and the balance to the other assets prorata based fair value.
A. Pretax discount rate. D. First, to any goodwill, and the balance to the other assets prorata based on carrying
B. The time value of money. FA © 2014 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.
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

35. How is the loss calculated for an impaired asset? Reversal of impairment
A. Fair value less carrying amount. 40. Which of the following statements is true concerning reversal of an impairment loss?
B. Cash outflows needed to obtain cash inflows. I. The increased carrying amount of the asset due to a reversal of an impairment loss shall
C. Future discounted cash flows less carrying amount. not exceed the carrying amount that would have been determined had no impairment
D. Future undiscounted cash flows less carrying amount. FA © 2014 loss been recognized in the prior years.
II. An impairment loss recognized for goodwill shall not be reversed in a subsequent period.
36. Impairment loss for productive asset shall be reported A. I only C. Both I and II
A. As an extraordinary item. B. II only D. Neither I nor II TOA © 2013
B. As a change in accounting estimate.
C. As a component of discontinued operation. 41. Which of the following statements is true concerning the reversal of an impairment loss?
D. As a component of income from continuing operations. FA © 2014 I. The reversal of the impairment loss shall recognized immediately as an adjustment of
the opening balance of retained earnings.
37. An entity is considering to apply an impairment test to an individual asset or to the cash II. The carrying amount of the asset shall be increased to the new recoverable amount.
generating unit to which the asset belongs. Which of the following statements is true? A. I only C. Both I and II
A. If the individual asset generates a significant proportion of cash inflows of the entity as a B. II only D. Neither I nor II TOA © 2013
whole, the cash generating unit should not be identified.
B. If the individual asset does not generate cash inflows that are largely independent from 42. Which of the following statements is true concerning reversal of an impairment loss?
other assets, the cash generating unit should be identified. I. The increased carrying amount of the asset due to a reversal of an impairment loss shall
C. If the individual asset generates an insignificant proportion of the cash inflows of the not exceed the carrying amount that would have been determined had no impairment
entity as a whole, the cash generating unit should not be identified. loss been recognized in the prior years.
D. All of these statements are true. FA © 2014 II. An impairment loss recognized for goodwill may be reversed in a subsequent period.
A. I only C. Both I and II
38. Which of the following statements is correct about the carrying amount of long-lived asset B. II only D. Neither I nor II FA © 2014
after an impairment loss has been recognized?
I. The reduced carrying amount of the asset may be increased in subsequent years if the Journal entry
impairment loss has been recovered. 43. When an entity determined that an equipment used in operations has suffered impairment in
II. The reduced carrying amount of the asset represents the amount that should be value, the entry to record the impairment should
depreciated over the remaining useful life of the asset. A. Include a credit to equipment.
A. I only C. Both I and II B. Include a credit to accumulated depreciation.
B. II only D. Neither I nor II FA © 2014 C. Not be made if the equipment is still being used.
D. Recognize extra depreciation expense for the period. FA © 2014
39. All of the following statements are true with regard to impairment of asset, except
Multiple Choice – Problems: Basic Problems
5. On January 1, 2010, Walton Company purchased a machine for P2,000,000 and established
Impairment loss an annual straight line depreciation rate of 10%, with no residual value. During 2014, the
1. On January 1, 2013, Laity Company purchased a patent with a cost of P5,200,000 and a entity determined that the machine will not be economically useful in production process after
useful life of ten years. On December 31, 2014, the entity determined that impairment December 31, 2014. The entity estimated that the machine had no residual value on
indicators were present'. The fair value less cost of disposal of the patent was estimated to be December 31, 2014 and would be disposed of in early 2015 at a cost of P50,000. In the
P3,600,000. The, value in use is estimated to be P3,800,000. What amount should be income statement for the year ended December 31, 2014, what amount of impairment loss
reported as impairment loss for 2014? should be reported for the machine?
A. 0 C. 560,000 A. 50,000 C. 1,050,000
B. 360,000 D. 880,000 FA © 2014 B. 1,000,000 D. 1,250,000 P1 © 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 year-
end, 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, the 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 7. On December 31,2014, Zee Company has an equipment with the following cost and
had a 10-year useful life and no residual value. Cm December 31, 2014, the following accumulated depreciation:
information was obtained: Equipment 9,000,000
Expected value of undiscounted cash flows 3,600,000 Accumulated depreciation 3,000,000
Fair value estimated with in-use premise 3,700,000 Due to obsolescence and physical damage, the equipment is found to be impaired. On
Fair value estimated with in-exchange premise 3,500,000 December 31,2014, the entity has determined the following information related to the
What amount should be recognized as impairment loss for 2014? equipment:
A. 0 C. 400,000 Fair value less cost of disposal 4,500,000
B. 300,000 D. 500,000 FA © 2014 Value in use or discounted net cash inflows 4,000,000
What amount should be reported as impairment loss for 2014?
4. On January 1, 2014, Leah Company owned a machine having a carrying amount of A. 0 C. 1,500,000
P2,400,000. The machine was purchased four years earlier for P4,000,000. The straight line B. 500,000 D. 2,000,000 P1 © 2014
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 8. During December 2014, Bubba Company determined that there had been a significant
entity sold the machine for P650,000 on January 5,2015. What amount should be recognized decrease in market value of an equipment used in the manufacturing process. On December
as impairment loss in 2014? 31,2014, the entity compiled the following information:
A. 0 C. 1,750,000 Original cost of equipment 5,000,000
B. 1,350,000 D. 2,000,000 FA © 2014 Accumulated depreciation 3,000,000
 Expected undiscounted net future cash inflows related to the Trademark 6,000,000
continued use and eventual disposal of the equipment 1,750,000 Patent 3,000,000
Fair value of equipment 1,250,000 The trademark has 8 years remaining in the legal life. However, it is anticipated that the
What amount of impairment loss should be reported in the income statement for the year trademark will be routinely renewed in the future. Thus, the trademark is considered to have
ended December 31, 2014? an indefinite life. Because of an inflationary economy, the trademark is expected to generate
A. 250,000 C. 3,250,000 cash flows of P200,000 per year. The appropriate discount rate is 10%. Mathematically, the
B. 750,000 D. 3,750,000 P1 © 2014 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
9. Synthia Company, a clothing manufacturer, purchased a sewing machine for P2,000,000 on years. It is expected that the patent will generate cash flows of P500,000 per year. The
July 1, 2011. The machine had a 10-year life, a PI00,000 residual value, and was depreciated appropriate discount rate is also 10%. The present value of an ordinary annuity of 1 at 10%
using the straight line method. On January 1, 2014, a test for impairment indicated that the for 5 periods is 3.79.
undiscounted cash flows from the sewing machine are less than carrying amount. The What total amount should be recognized as impairment loss in 2014?
machine's fair value on January 1,2014 is P600,000. What is the loss on impairment? A. 0 C. 4,000,000
A. 830,000 C. 950,000 B. 1,105,000 D 5,105,000 P1 © 2014
B. 925,000 D. 1,300,000 FA © 2014
13. At year-end, Bullheaded Company determined that there had been a significant decrease in
10. Silver Company had an equipment with a carrying amount of P450,000 at year-end. The market value of an equipment and compiled the following information:
following information was available at year-end: Original cost of equipment 5,000,000
Expected undiscounted net cash flows 420,000 Accumulated depreciation 3,000,000
Expected discounted net cash flows 400,000 Expected undiscounted net future cash inflows
Fair value, using similar asset 415,000 related to the continued use of the equipment 1,750,000
Fair value, assuming the asset is sold stand-alone 428,000 Fair value less cost of disposal of equipment 1,250,000
What is the impairment loss that should be reported in the income statement for the current What amount of impairment loss should be recognized for the current year?
year? A. 250,000 C. 3,250,000
A. 22,000 C. 35,000 B. 750,000 D. 3,750,000 FA © 2014
B. 30,000 D. 50,000
14. On January 1, 2014, Downtown Company acquired the following intangible assets:
11. Seafarer Company has an oil platform in the sea. The entity has to decommission the  A trademark for P2,000,000. The trademark has a remaining legal life of 8 years. The
platform at the end of the useful life, and a provision was set up at the commencement of trademark will be renewed in the future indefinitely without problem.
production. The carrying amount of the provision for decomissioning is P5,000,000. The  A patent for P6,000,000. The patent has an economic life for just 5 years.
entity has received an offer of P8,000,000 for the rights to the platform which reflects the fact On December 31, 2014, the intangible assets are tested for impairment. The trademark is
that Seafarer Company has to decommission it at the end of the useful life. Disposal costs now expected to generate cash flows of just P120,000 per year. The cash flows expected to
would be P500,000. The value in use of the oil platform is P12,000,000 ignoring the be generated by the patent amount to PI,000,000 annually for each of the next 4 years. The
decommissioning cost. The carrying amount of the oil platform is P15,000,000. What amount appropriate discount rate for all intangible assets is 8%. The present value of an ordinary
should be recognized as impairment loss for the current year in relation to the oil platform? annuity of 1 at 8% for 4 periods is 3.31. What is the total impairment loss to be recognized for
A. 2,000,000 C. 3,000,000 the current year?
B. 2,500,000 D. 7,500,000 FA © 2014 A. 1,990,000 C. 1,300,000
B. 1,490,000 D. 4,810,000 FA © 2014
12. On December 31, 2014. Visayas Company showed the following intangible assets.
Depreciation expense A. 750,000 C. 812,500
15. Mortal Company acquired a machine for P3,200,000 on August 31, 2011. The machine has a B. 787,500 D. 825,000 P1 © 2014
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 Accumulated depreciation
undiscounted cash inflows related to the continued use and eventual disposal of the machine 18. Gei Company determined that, due to obsolescence, equipment with an original cost of
amount to P1,500,000. The fair value less cost of disposal of the machine on May 31, 2014 is P9,000,000 and accumulated depreciation on January 1, 2014, of P4,200,000 had suffered
P1,350,000 with no residual value. Assuming a loss on impairment is recognized on May 31, permanent impairment, and as a result should have a carrying amount of only P3,000,000 as
2014, what is the depreciation of the machine for June 2014? of the beginning of the year. In addition, the remaining useful life of the equipment was
A. 45,000 C. 51,000 reduced from 8 years to 3. In the December 31, 2014 statement of financial position, what
B. 50,000 D. 53,000 FA © 2014 amount should be reported as accumulated depreciation?
A. 1,000,000 C. 6,000,000
16. Kinsman Company acquired a machine on January 1, 2014 for P8,000,000. The machine B. 5,200,000 D. 7,000,000 P1 © 2014
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 Carrying amount
the plant. The engineers and technicians could not repair this damage and therefore the 19. Cynosure Company has an equipment with carrying amount of P1,600,000 on December
machine's performance was expected to decline in the future. It is now determined that the 31,2014 after recording depreciation for 2014. The following information is available on
machine had a remaining life of 5 years and a zero residual value. On December 31, 2015, a December 31,2014 relative to the equipment:
test for recoverability revealed that the expected net future undiscounted cash flows related Fair value of similar equipment 1,400,000
to the continued use and eventual disposal of the machine totaled P7,000,000. The fair value Discounted future cash flows 1,300,000
less cost of disposal of the machine on December 31, 2015 is P6,600,000 while the Undiscounted future cash flows 1,350,000
discounted net future cash flows amount to P6,300,000. What amount of depreciation should At what amount should the equipment be reported on December 31, 2014?
be recognized for 2016? A. 1,300,000 C. 1,400,000
A. 1,260,000 C. 1,320,000 B. 1,350,000 D. 1,600,000 FA © 2014
B. 1,300,000 D. 1,400,000 FA © 2014
20. On January 1, 2011, Roundabout Company purchased a machine for P800,000 and
17. Kenya Company acquired a machine on January 1, 2013 for P8,000,000. The machine has a established an annual depreciation charge of P100,000 over an eight-year life. During 2014,
10-year useful life, a P500,000 residual value, and is to be depreciated using the straight line after issuing the 2013 financial statements, the entity concluded that the machine suffered
method. permanent impairment of the operational value, and P200,000 is a reasonable estimate of the
By the end of 2014, the machine was damaged by a major accident occurring in the plant. amount expected to be recovered through use of the machine for the period January 1, 2014
The engineers and technicians could not repair this damage and therefore the machine's through December 31, 2018. What should be reported as carrying amount of the machine on
performance was expected to decline in the future and unlikely to be sold at the end of the December 31, 2014?
useful life. Thus, the machine has a zero residual value. A. 0 C. 160,000
On December 31,2014, a test for recoverability revealed that the expected net future B. 100,000 D. 400,000 FA © 2014
undiscounted cash flows related to the continued use and eventual disposal of the machine
totaled P7,000,000. 21. On July 1,2011, Rey Company purchased computer equipment at a cost of P3,600,000. The
The fair value on December 31, 2014 is P6,600,000 while the discounted net future cash equipment had a six-year life with no residual value and was depreciated by the straight line.
flows amount to P6,300,000. On January 1,2014, the entity determined that this equipment had been permanently
What is the depreciation expense that should be recognized for the year ended December impaired, and that P700,000 could be recovered over the remaining useful life of the
31, 2014? equipment. What is the carrying amount of the equipment on December 31,2014?
 A. 0 C. 700,000 31,2014, the entity determined that the fair value of the impaired asset had increased to
B. 500,000 D. 1,500,000 P1 © 2014 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
22. In January 2012, Winn Company purchased equipment at a cost of P5,000,000. The for 2014?
equipment had an estimated residual value of PI,000,000, an estimated 8-year useful life, A. 0 C. 1,750,000
and was being depreciated by the straight line method. Two years later, it became apparent B. 1,500,000 D. 2,250,000 P1 © 2014
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 26. Tausug Company reported the following calculation relating to an impairment loss suffered on
life, and the residual value should be reduced to P250,000. On December 31, 2014, what is December 31,2014:
the carrying amount of the equipment? Goodwill Net assets
A. 1,000,000 C. 1,750,000 Carrying amount 3,000,000 9,000,000
B. 1,500,000 D. 3,500,000 P1 © 2014 Impairment loss (3,000,000) (2,000,000)
Adjusted carrying amount - 7,000,000
23. Scarbrough Company had purchased equipment for P2,800,000 on January 1,2011. The There has been a favorable change in the estimate of the recoverable amount of the net
equipment had an 8-year life and residual value of P400,000. The entity depreciated the assets. The recoverable amount is now P8,000,000 on December 31,2015. The carrying
equipment using the straight line method. In August 2014, the entity questioned the amount of the net assets would have been P7,200,000 on December 31,2015 if there was no
recoverability of the carrying amount of this equipment. On August 31,2014, the undiscounted impairment loss recognized on December 31,2014. Assets are depreciated at 20% of
expected net future cash inflows related to the continued use and eventual disposal of the reducing balance.
equipment amounted to P1,600,000. The equipment's fair value on August 31, 2014 is What gain on reversal of impairment should be recognized in 2015?
PI,500,000. After any loss on impairment has been recognized, what is the carrying amount A. 0 C. 1,600,000
of the equipment? B. 1,000,000 D. 2,400,000 FA © 2014
A. 1,300,000 C. 1,600,000
B. 1,500,000 D. 1,700,000 FA © 2014 Depreciation & impairment loss
27. On January 1, 2010, Waiver Company purchased a machine for P2,000,000 and established
24. Bronze Company operates a production line which is treated as a cash generating unit. At an annual straight line depreciation rate of 10%, with no residual value. During 2014 the
year-end, the carrying amounts of the noncurrent assets of this cash generating unit are: entity determined that the machine will not be economically useful in the production process
Intangibles-goodwill 1,100,000 after December 31, 2014.
Tangibles-plant and machinery 2,200,000 The entity estimated that the machine had no residual value on December 31, 2014, and
At year-end, the recoverable amount of the production line is estimated at P2,700,000. would be disposed of in early 2015 atacostofP50,000.
What are the revised carrying amounts of the intangible and tangible noncurrent assets, In the income statement for the year ended December 31, 2014, what amount and type of
respectively? charge should be reported for the machine?
A. 500,000 and 2,200,000 C. 900,000 and 1,800,000 FA © 2014 A. B. C. D.
B. 800,000 and 1,900.000 D. 1,100,000 and 1,600,000 FA © 2014 Depreciation 0 200,000 200,000 1,200,000
Impairment loss 1,250,000 1,000,000 1,050,000 50,000
Gain on reversal of impairment
25. Lobo Company reported an impairment loss of P2,000,000 in 2013. This loss was related to Comprehensive
an item of property, plant and equipment which was acquired on January 1,2012 with cost of Questions 1 & 2 are based on the following information. P1 © 2014
P10,000,000, useful life of 10 years and no residual value. On December 31,2013, the entity Zambia Company purchased four convenience store buildings on January 1, 2008 for a total of
reported this asset at P6,000,000 which is the fair value on such date. On December 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 December 31, 2014 December 31, 2015
a hotel and restaurant. Because of the change in the use of the buildings, the entity is evaluating Fair value less cost of disposal 8,100,000 8,400,000
the buildings for possible impairment. The entity estimated that the buildings have a remaining Value in use 8,550,000 8,200,000
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 32. What is the impairment loss for 2014?
0,000,000. The appropriate discount rate is 12%. The present value of an ordinary annuity of 1 at A. 0 C. 1,800,000
12% for 10 periods is 5.65. B. 1,350,000 D. 2,450,000

28. What amount of impairment loss should be recognized for 2014? 33. What is the gain on reversal of impairment for 2015?
A. 0 C. 8,250,000 A. 0 C. 400,000
B. 7,500,000 D. 9,775,000 B. 250,000 D. 800,000

29. What is the depreciation of the buildings for 2014?' Questions 1 thru 3 are based on the following information. FA © 2014
A. 762,750 C. 900,000 On January 1, 2014, Elite Company purchased equipment with a cost of P11,000,000, useful life of
B. 847,500 D. 1,000,000 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
Questions 1 & 2 are based on the following information. P1 © 2014 residual value. The following information is available for impairment testing at each year end:
On January 1,2014, Zimbabwe Company has a machinery with cost of P5,000,000 and December 31, 2014 December 31, 2015
accumulated depreciation of P1,500,000. The machinery was acquired on January 1, 2011 and Fair value less cost of disposal 8,100,000 8,400,000
had been depreciated using the straight line method with useful life of 10 years and no residual Value in use 8,550,000 8,200,000
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 34. What is the impairment loss for 2014?
inflows of P800,000 per year. The fair value of the machinery on January 1,2014 is P3,000,000. A. 0 C. 1,800,000
The appropriate discount rate is 8%. The present value of an ordinary annuity of 1 at 8% for 5 B. 1,350,000 D. 2,450,000
periods is 3.99.
35. What is the gain on reversal of impairment for 2015?
30. What amount should be recognized as an impairment loss for 2014? A. 0 C. 800,000
A. 0 C. 500,000 B. 400,000 D. 1,200,000
B. 308,000 D. 808,000
36. What is the depreciation for 2016?
31. What is the depreciation of the machinery for 2014? A. 950,000 C. 1,050,000
A. 300,000 C. 600,000 B. 1,025,000 D. 1,100,000
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.
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: Accumulated depreciation 4,000,000
Retailing 300,000 Goodwill 3,000,000
Service 200,000 Accounts payable 2,000,000
Financing 400,000 Loans payable 1,000,000
Near the end of 2014, a new major competitor entered the entity's market and the entity was The entity determined that the value in use of the cash generating unit isP30,000,000.
concerned that this might cause a significant decline in the value of goodwill. Accordingly, the The accounts receivable are considered collectible, except those considered doubtful.
entity computed the implied value of the goodwill for the tnree major reporting units on What is the impairment loss to be allocated to property, plant and equipment?
December 31,2014 as follows: A. 2,400,000 C. 4,000,000
Retailing 250,000 B. 2,880,000 D. 4,200,000 P1 © 2014
Service 100,000
Financing 600,000 40. Brandy Company has two cash generating units. On December 31, 2014, the carrying
What is the amount of impairment of goodwill that should be recorded on December 31, amounts of the assets of one cash generating unit are:
2014? Inventory 200,000
A. 0 C. 150,000 Accounts receivable 300,000
B. 100,000 D. 250,000 FA © 2014 Plant and equipment 6,000,000
Accumulated depreciation 2,600,000
Impairment loss - allocated Patent 850,000
38. Palawan Company has determined that the electronics division is a cash generating unit. The Goodwill 100,000
entity calculated the value in use of the division to be P8,000,000. The assets of the cash The accounts receivable are regarded as collectible and the fair value less cost of disposal of
generating unit at carrying amount are as follows: the inventory is equal to the carrying amount. The patent has a fair value less cost of disposal
Building 5,000,000 of P750,000. On December 31,2014, the entity undertook impairment testing of the cash
Equipment 3,000,000 generating unit and determined the value in use of the unit at P4,050,000.
Inventory 2,000,000 What is the impairment loss to be allocated to the plant and equipment?
10,000,000 A. 560,000 C. 700,000
The entity has also determined that the fair value less cost of disposal of the building is B. 600,000 D. 800,000 P1 © 2014
P4,500,000. What is the impairment loss to be allocated to the equipment?
A. 400,000 C. 900,000 41. Uranus Company has various cash generating units. On December 31,2014, one cash
B. 600,000 D. 1,000,000 P1 © 2014 generating unit has the following carrying amount of assets:
Cash 600,000
39. One of the cash generating units of Sanmig Company is the production of liquor. On Inventory 1,400,000
December 31,2014, the entity believed that the assets of the cash generating unit (CGU) are Land 2,500,000
impaired based on an analysis of economic indicators. Plant and equipment 9,000,000
The assets and liabilities of the cash generating unit at carrying amount on December 31, Accumulated depreciation 1,500,000)
2014 are: Goodwill 1,000,000
Cash 4,000,000 Carrying amount 13,000,000
Accounts receivable 6,000,000 As part of the impairment testing procedure, the management determined the value in use of
Allowance for doubtful accounts 1,000,000 the cash generating unit at P8,500,000. The fair value less cost of disposal for the inventory
Inventory 7,000,000 is greater than the carrying amount. What is the impairment loss to be allocated to plant and
Property, plant and equipment 22,000,000 equipment?
 A. 2,625,000 C. 3,500,000 On December 31,2014, Zernice Company acquired the following three intangible assets:
B. 3,375,000 D. 4,500,000 P1 © 2014 * 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.
Revised carrying amounts * Goodwill for P500,000.
42. Bronze Company operates a production line which is treated as a cash generating unit for * A customer list for P2,100,000. By contract, the entity has exclusive use of the list for five
impairment review purposes. On December 31,2014, the carrying amounts of the noncurrent years. However, it is expected that the list will have an economic life of 3 years.
assets are as follows: On December 31,2015, before any adjusting entries for the year were made, the following
Goodwill 1,100,000 information was assembled:
Machinery 2,200,000 a. Because of a decline in the economy, the trademark is now expected to generate cash flows
On December 31,2014, the value in use of the production line is estimated at P2,700,000. of just P105,000 per year.
What are the revised carrying amounts of the goodwill and machinery, respectively? b. The cash flow expected to be generated by the cash generating unit to which the goodwill is
A. 500,000 and 2,200,000 C. 900,000 and 1,800,000 related is P200,000 per year for the next 20 years. The carrying amounts of the assets and
B. 800,000 and 1,900,000 D. 1,100,000 and 1,600,000 P1 © 2014 liabilities of the cash generating unit are:
Identifiable assets 3,500,000
Comprehensive Goodwill 500,000
Questions 1 & 2 are based on the following information. P1 © 2014 Liabilities 1,100,000
At the beginning of current year, Jolo Company acquired all the assets and liabilities of another It is reliably determined that the cash flows of the cash generating unit cannot be computed
entity. The acquiree has a number of operating divisions, including one whose major industry is the without consideration of the liabilities.
manufacture of toy train. The toy train division is regarded as a cash generating unit. In paying c. The cash flows expected to be generated by the customer list are P800,060 in 2016 and
P20,000,000 for the net assets of the acquiree, Jolo calculated that it had acquired goodwill of P500,000 in 2017.
P2,400,000. The goodwill was allocated to each of the divisions, and the assets and liabilities d. The appropriate discount rate is 6%. The present value of 1 at 10% is .94 for one period and
acquired are measured at fair value at acquisition date. At year-end, the carrying amounts of the .89 for two periods. The present value of an ordinary annuity of 1 at 10% for 20 periods is
assets of the toy train division were: 11.45.
Building 2,000,000
Inventory 1,500,000 45. What is the impairment loss on trademark?
Trademark 1,000,000 A. 0 C. 1,750,000
Goodwill 500,000 B. 1,250,000 D. 3,000,000
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. 46. What is the impairment loss on goodwill?
A. 0 C. 500,000
43. What is the impairment loss on goodwill? B. 110,000 D. 610,000
A. 0 C. 250,000
B. 140,000 D. 500,000 47. What is the impairment loss on customer list?
A. 0 C. 203,000
44. What is the impairment loss to be allocated to the building? B. 178,000 D. 243,000
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
 Annual cash inflows 700,000
1. Answer is (B). Multiply by PV of an ordinary annuity of 1 at 8% for 15 periods 8.56
Acquisition cost 5,200,000 Value in use 5,992,000
Amortization for 2013 & 2014 (5,200,000 / 10 x 2) (1,040,000) The value in use is the recoverable amount because it is higher than the fair value of
Carrying amount – 12/31/2014 4,160,000 P5,300,000.
Value in use – higher than fair value 3,800,000 Cost - January 1,2011 10,000,000
Impairment loss 360,000 Accumulated depreciation – Dec. 31, 2014 (10,000,000/25 x 4) 1,600,000
Carrying amount - December 31, 2014 8,400,000
2. Answer is (B). Recoverable amount 5,992,000
Intangible asset – 1/1/2014 3,000,000 Impairment loss 2,408,000
Amortization for 2014 (3,000,000 / 10) (300,000)
Carrying amount – 12/31/2014 2,700,000 7. Answer is (C).
Fair value - higher than value in use 4,500,000
Value in use (300,000 x 7.11) 2,133,000 Carrying amount 6,000,000
Carrying amount 2,700,000 Impairment loss (1,500,000)
Impairment loss (567,000) 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
3. Answer is (B). value less cost of disposal, whichever is higher. The impairment is recorded as follows:
Cost - January 1,2013 5,000,000 Impairment loss 1,500,000
Accumulated depreciation (5,000,000 /10 x 2) (1,000,000) Accumulated depreciation 1,500,000
Carrying amount - December 31, 2014 4,000,000
Recoverable amount equal to fair value with in-use premise 3,700,000 8. Answer is (B).
Impairment loss 300,000 Cost of equipment 5,000,000
Accumulated depreciation 3,000,000
4. Answer is (B). Carrying amount 2,000,000
Carrying amount - January 1, 2014 2,400,000 Fair value of equipment 1,250,000
Depreciation for 2014 (1,600,000/4) 400,000 Impairment loss 750,000
Carrying amount - • December 31,2014 2,000,000 The net future cash inflows are not used in determining impairment loss because the inflows
Recoverable amount equal to the sale price 650,000 are undiscounted.
Impairment loss for 2014 1,350,000
9. Answer is (B).
5. Answer is (C). Cost 2,000,000
Cost - January 1,2010 2,000,000 Accum. depr’n - January 1, 2014 (2,000,000-100,000/10 x 2.5) 475,000
Accumulated depreciation - 12/31/2014 (200,000 x 5) 1,000,000 Carrying amount - January 1,2014 1,525,000
Carrying amount - December 31, 2014 1,000,000 Fair value 600,000
Estimated cost of disposal 50,000 Impairment loss 925,000
Impairment loss 1,050,000
10. Answer is (A).
6. Answer is (B). Impairment loss (450,000 – 428,000) 22,000
 Amortization for 2014 (6,000,000 / 5) 1,200,000
11. Answer is (B). Carrying amount – 12/31/2014 4,800,000
Offer price 8,000,000 Value in use (1,000,000 x 3/31) 3,310,000
Disposal cost (500,000) Impairment loss 1,490,000
Fair value less cost of disposal 7,500,000
Value in use 12,000,000 15. Answer is (B). From August 21. 3011 to May 31, 2014 is a period of 33 months. Thus, the
Carrying amount of provision (5,000,000) remaining life of the machine is 27 months, 60 months original life minus 33.
Adjusted value in use 7,000,000 Depreciation for June 2014 (1,350,000 / 27 months) 50,000
Carrying amount of old platform 15,000,000
Carrying amount of provision (5,000,000) Cost 3,200,000
Adjusted carrying amount 10,000,000 Accum. depn. – 5/31/2014 (3,200,000 – 500,000) x 33/60 1,485,000
Recoverable amount – equal to fair value less cost of disposal Carrying amount – 5/31/2014 1,715,000
being the higher amount 7,500,000 Fair value less cost of disposal 1,350,000
Impairment loss 2,500,000 Impairment loss 365,000

12. Answer is (D). 16. Answer is (B).

Trademark 6,000,000 Cost – January 1, 2014 8,000,000
Present value of indefinite cash flows (200,000/10%) 2,000,000 Accumulated depreciation (8,000,000 – 500,000) / 10 x 2 (1,500,000)
Impairment loss 4,000,000 Carrying amount – December 31, 2015 6,500,000
Patent 3,000,000 The recoverable amount is equal to the fair value of P6,600,000 which is higher than the
Present value of cash flows (500,000x3.79) 1,895,000 value in use of P6,300,000. Since the recoverable amount is higher than the carrying
Impairment loss 1,105,000 amount, no impairment loss is recognized. Accordingly, the carrying amount is allocated over
Total impairment loss (4,000,000 + 1,105,000) 5,105,000 the remaining useful life.
Depreciation for 2016 (6,500,000 / 5 years remaining) 1,300,000
13. Answer is (B).
Cost of equipment 5,000,000 17. Answer is (C).
Accumulated depreciation 3,000,000 Cost - January 1, 2013 8,000,000
Carrying amount 2,000,000 Accumulated depreciation (8,000,000-500,000)/10 x 2 (1,500,000)
Fair value of equipment 1,250,000 Carrying amount - December 31,2014 6,500,000
Impairment loss 750,000 The recoverable amount is equal to the fair value of P6,600,000 which is higher than the
The net future cash inflows are not used in determining impairment loss because the inflows value in use of P6,300,000. Since the recoverable amount is higher than the carrying
are undiscounted. amount, no impairment loss is recognized. Accordingly, the carrying amount is allocated over
the remaining useful life.
14. Answer is (A). Depreciation for 2015 (6,500,000 / 8 years remaining) 812,500
Trademark 2,000,000
Value in use (120,000 / 8%) 1,500,000 18. Answer is (D).
Impairment loss 500,000 Cost 9,000,000
Accumulated depreciation - January 1, 2014 4,200,000
Patent 6,000,000 Carrying amount - January 1, 2014 4,800,000
 Expected recoverable amount 3,000,000 23. Answer is (B).
Impairment loss 1,800,000 Cost - January 1,2011 2,800,000
Impairment loss 1,800,000 Accum. depr’n - August 31, 2014 (2,400,000 / 96 months x 44) 1,100,000
Accumulated depreciation 1,800,000 Carrying amount - August 31,2014 1,700,000
Adjusted accum. depr’n, Jan. 1, 2014 (4,200,000 + 1,800,000) 6,000,000 Impairment loss ( 200,000)
Depreciation for 2014 (3,000,000 / 3) 1,000,000 Fair value-August 31,2014 1,500,000
Accumulated depreciation - December 31,2014 7,000,000
24. Answer is (A).
19. Answer is (C). Carrying amount of cash generating unit 3,300,000
Carrying amount 1,600,000 Value in use 2,700,000
Recoverable amount equal to fair value which is higher than value in use 1,400,000 Impairment loss 600,000
Impairment loss 200,000 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.
20. Answer is (C).
Cost, January 1, 2011 800,000 25. Answer is (C).
Accumulated depreciation, Dec. 31, 2013 (100,000 x 3) 300,000 Fair value - January 1,2014 6,000,000
Carrying amount, Dec. 31, 2013 500,000 Depreciation for 2014 (6,000,000 / 8) 750,000
Recoverable amount 200,000 Carrying amount - 12/31/2014-with impairment 5,250,000
Impairment loss 300,000
The loss is recorded as follows: Cost - January 1, 2012 10,000,000
Impairment loss 300,000 Accumulated depreciation - December 31, 2014 (10,000,000/10x3) 3,000,000
Accumulated depreciation 300,000 Carrying amount - 12/31/2014 - assuming no impairment 7,000,000
Carrying amount — 12/31 /2014 — with impairment 5,250,000
Cost 800,000 Gain on reversal of impairment 1,750,000
Accumulated depreciation (300,000 + 300,000) 600,000 PAS 36, paragraph 117, provides that the fair value cannot exceed the carrying amount
Recoverable amount, January 1, 2014 200,000 assuming there was no impairment.
Depreciation for 2014 (200,000 / 5) 40,000
Carrying amount, December 31, 2014 160,000 26. Answer is (C).
Carrying amount - December 31, 2014 7,000,000
21. Answer is (B). Depreciation for 2015 (20%) x 7,000,000) (1,400,000)
Recoverable amount - January 1, 2014 700,000 Carrying amount - 12/31/2015 with impairment 5,600,000
Depreciation for 2014 (700,000 / 3.5) 200,000
Carrying amount - December 31,2014 500,000 Carrying amount - 12/31/2015 assuming no impairment 7,200,000
Carrying amount - 12/31/2015 with impairment 5,600,000
22. Answer is (A). Gain on reversal of impairment 1,600,000
Carrying amount - January 1, 2014 1,750,000 The recoverable amount of P8,000,000 is ignored because it exceeds the carrying amount of
Depreciation for 2014 (1,750,000 - 250,000 / 2) 750,000 P7,200,000 on December 31,2015 assuming no impairment.
Carrying amount - December 31,2014 1,000,000
27. Answer is (C).
 Depreciation for 2015 (10% x 2,000,000) 200,000 Depreciation for 2015 (8,550,000/9) . ( 950,000)
Carrying amount- 12/31/2015 with impairment 7,600,000
Cost – 1/2/2010 2,000,000 Cost - January 1, 2014 11,000,000
Accum. depn. – 12/31/2014 (200,000 x 5) 1,000,000 Accumulated depreciation – Dec. 31,2015 (11,000,000/10x2) ( 2,200,000)
Carrying amount – 12/31/2014 1,000,000 Maximum carrying amount - 12/31/2015 no impairment 8,800,000
Estimated cost of disposal 50,000 Fair value less cost of disposal - 12/31/2015, higher than value in use 8,400,000
Impairment loss 1,050,000 Carrying amount - 12/31/2015 with impairment 7,600,000
Gain on reversal of impairment for 2015 800.000
28. Answer is (C).
Fair value 10,000,000 34. Answer is (B).
Present value of net cash inflows (1,500,000 x 5.65) 8,475,000 Cost – 1/1/2014 11,000,000
Buildings 25,000,000 Accum. depn. (11,000,000 / 10) (1,100,000)
Accumulated depreciation (22,500,000 / 20 x 6) 6,750,000 Carrying amount – 12/31/2014 9,900,000
Carrying amount - January 1, 2014 18,250,000 Value in use – higher than fair value 8,550,000
Fair value - higher than value in use 10,000,000 Impairment loss for 2014 1,350,000
Impairment loss 8,250,000
35. Answer is (C).
29. Answer is (D). Depreciation for 2014 (10,000,000 /10) 1,000,000 Carrying amount – 1/1/2014 8,550,000
Depreciation for 2015 (8,550,000 / 9) (950,000)
30. Answer is (B). Carrying amount – 12/31/2015 with impairment 7,600,000
Fair value 3,000,000
Present value of net cash inflows (800,000 x 3.99) 3,192,000 Cost – 1/1/2014 11,000,000
Machinery 5,000,000 Accum. depn. – 12/31/2015 (11,000,000 / 10 x 2) (2,200,000)
Accumulated depreciation 1,500.000 Maximum carrying amount – 12/31/2014 no impairment 8,800,000
Carrying amount - January 1,2014 3,500,000
Present value of net cash inflows or value in use - higher 3,192,000 Fair value less cost of disposal – 12/31/2015 higher than fair value8,400,000
Impairment loss 308,000 Carrying amount – 12/31/2015 with impairment 7,600,000
Gain on reversal of impairment for 2015 800,000
31. Answer is (D). Depreciation for 2014 (3,192,000 / 5 years) 638,400
36. Answer is (C).
32. Answer is (D). Depreciation for 2016 (8,400,000 / 8) 1,050,000
Cost-January 1,2014 11,000.000
Accumulated depreciation (11,000,000 /10) (1,100,000) 37. Answer is (C).
Carrying amount - December 31, 2014 9,900,000 Goodwill Implied value Loss
Value in use - higher than fair value 8,550,000 Retailing 300,000 250,000 50,000
Impairment loss for 2014 1,350,000 Service 200,000 100,000 100,000
Financing 400,000 600,000 - .
33. Answer is (D). Total impairment loss 150,000
Carrying amount - January 1, 2015 8,550,000 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 Carrying amount Fraction Loss
goodwill exceeds the carrying amount. Inventory 7,000,000 7/25 1,120,000
Property, plant and equipment 18,000,000 18/25 2,880,000
38. Answer is (C). 25,000,000 4,000,000
Carrying amount of cash generating unit 10,000,000 The impairment loss is not allocated to the accounts receivable because the accounts are
Value in use 8,000,000 considered collectible except those doubtful.
Impairment loss 2,000,000 Carrying amount of CGU
Observe that the liabilities of the cash generating unit are ignored in determining the carrying
Allocation of impairment loss amount of the CGU.
Building (5/10x2,000,000) 1,000,000 PAS 36, paragraph 76, provides that the carrying amount of a cash generating unit includes
Equipment (3/10x2,000,000) 600,000 "the carrying amount of only those assets that can be attributed directly or allocated on a
Inventory (2/10x2,000,000) 400,000 reasonable and consistent basis to the cash generating unit" and shall generate the future
2,000,000 cash inflows used in determining the value in use of the cash generating unit
Observe that after allocating the PI,000,000 loss to the building, the carrying amount of the Paragraph 76 further provides that the carrying amount of the cash generating unit does not
building would be P4,000,000 which is lower than its fair value of P4,500,000. PAS 36, include the carrying amount of any recognized liability, unless the recoverable amount of the
paragraph 105, provides that the carrying amount of an asset shall not be reduced below the cash generating unit cannot be determined without consideration of this liability.
highest of fair value less cost of disposal, value in use and zero. The amount of impairment The reason is stated in PAS 36, paragraph 43, which mandates that to avoid double
loss that would otherwise have been allocated to the asset shall be reallocated prorata to the counting, estimates of future cash flows do not include cash outflows that relate to obligations
other noncash assets of the cash generating unit. that have been recognized as liabilities by 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. 40. Answer is (B).
Building Equipment Inventory Inventory 200,000
Allocated loss 1,000,000 600,000 400,000 Accounts receivable 300,000
Reallocated loss: ( 500,000) Plant and equipment (6,000,000-2,600,000) 3,400,000
(3/5 x 500,000) 300,000 Patent 850,000
(2/5x500,000) . 200,000 . Goodwill 100,000
Impairment loss 500,000 900,000 600,000 Carrying amount of CGU 4,850,000
Value in use 4,050,000
39. Answer is (B). Impairment loss 800,000
Cash 4,000,000 Impairment loss allocated to goodwill 100,000
Accounts receivable - net 5,000,000 Remaining impairment loss 700,000
Inventory 7,000,000
Property, plant and equipment - net 18,000,000 Plant Patent
Goodwill 3,000,000 Allocated loss
Carrying amount of CGU 37,000,000 (3,400 / 4,250 x 700,000) 560,000
Value in use- 30,000,000 ( 850/4,250 x 700,000) 140,000
Impairment loss 7,000,000 Reallocated loss 40,000 ( 40,000)
Impairment loss allocated to goodwill 3,000,000 600,000 100,000
Remaining impairment loss 4,000,000 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 Inventory 1,500,000 15/45 300,000
accounts are considered collectible and the fair value less cost of disposal of the inventory is Trademark 1,000,000 10/45 200,000
equal to the carrying amount. 4,500,000 900,000
The remaining loss of P900,000 is allocated to the assets other than goodwill based on
41. Answer is (A). carrying amount.
Carrying amount of CGU 13,000,000
Value in use 8,500,000 45. Answer is (B).
Impairment loss 4,500,000 Trademark 3,000,000
Impairment loss allocated to goodwill 1,000,000 PV of cash flows (105,000/6%) 1,750,000
Remaining impairment loss 3,500,000 Impairment loss on trademark 1,250,000
Carrying amount Fraction Loss
Land 2,500,000 25/100 875,000 46. Answer is (C).
Plant and equipment 7,500,000 75/100 2,625,000 Carrying amount of net assets (4,000,000 -1,100,000) 2,900,000
10,000,000 3,500,000 PV of cash flows (200,000 x 11.45) 2,290,000
No impairment loss is allocated to inventory because the fair value less cost of disposal of Impairment loss on CGU 610,000
inventory is higher than carrying amount. Impairment loss on goodwill (500,000)
Impairment loss on other assets 110,000
42. Answer is (A).
Carrying amount of cash generating unit 3,300,000 47. Answer is (C).
Value in use 2,700,000 Customer list-January 1, 2015 2,100,000
Impairment loss 600,000 Amortization for 2015 (2,100,000/3) ( 700,000)
The impairment loss is applied against the goodwill only. Thus, goodwill has an adjusted Carrying amount - December 31, 2015 1,400,000
balance of P500,000 and the balance of the machinery remains the same at P2,200,000. PV of cash flows (800,000 x .94 + 500,000 x .89) 1,197,000
Impairment loss on customer list 203,000
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).

Carrying amount Fraction Loss
Building 2,000,000 20/45 400,000