Chapter 22

Impairment of Assets

PROBLEM 1: TRUE OR FALSE

1. FALSE
2. TRUE
3. FALSE ₱2 (18 – 20)
4. FALSE
5. FALSE
6. TRUE
7. TRUE
8. FALSE ₱10 (40 – 50 original cost)
9. FALSE ₱10
10. TRUE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. D
2. C
3. C

4. Solution: (800,000 – 80,000) = 720,000;

(720,000 – 1,000,000) = 280,000

5. Solution:
The value in use is computed as follows:
Cash PV Factors Present
  flows @10% value
Future revenues from the
continuing use of the
asset 90,000 PV ordinary, n=4a 285,288
180,00
Residual value – revised 0 PV of 1, n=4a 122,942
Total 408,230

a
(8 years revised useful life – 4 years passed) = 4

The recoverable amount is determined as follows:

Fair value less costs of disposal (480,000 – 100,000) 380,000
Value in use 408,230
Recoverable amount (VIN – the higher amount) 408,230

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The impairment loss is computed as follows:

Recoverable amount (VIN) 408,230

Carrying amount [(1M - 200K) x 6/10] + 200K 680,000

Impairment loss (271,770)

The journal entries are as follows:

1/1/x5
Impairment loss 271,770
Accumulated depreciation 271,770

12/31/x5
Depreciation expense (408,230 – 180K) ÷ 4 57,058
Accumulated depreciation 57,058

6. Solution:
The value in use is computed as follows
PV of 1
Year Cash flows Present value
@12%
20x2 12,000,000 n=1 10,714,286
20x3 10,000,000 n=2 7,971,939
20x4 9,000,000 n=3 6,406,022
20x5 8,000,000 n=4 5,084,145
Residual value 2,000,000 n=4 1,271,036

Total 31,447,428

The impairment loss is computed as follows:

Recoverable amount (VIN) 31,447,428

Carrying amount (38,000,000)

(6,552,57
Impairment loss 2)

7. Solution:
The value in use is computed as follows:
Cash PV factors Present
Year
flows @10% value
PV ordinary,
20x2 to 20x6 (first 5 yrs.) 1,000,000 n=5 3,790,787
20x7 (6th yr.) (1M x 96%) 960,000 PV of 1, n=6 541,895
20x8 (7th yr.) (960K x 883,200 PV of 1, n=7 453,221

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98%)
Value in use 4,785,903

Recoverable amount 4,785,903

Carrying amount (25M – 19M) 6,000,000
Impairment loss (1,214,097)

8. Solution:
The impairment loss is computed as follows:
Recoverable amount (VIN) 15,900,000
Carrying amount (4.6M + 4.5M + 3.5M + 7M + 1M -
2.3M) 18,300,000
Impairment loss (2,400,000)

The impairment loss is allocated to the assets of the CGU (that are within the
scope of PAS 36) as follows:
Impairment loss (2,400,000)
Goodwill 1,000,000
Excess to be allocated to the other assets (1,400,000)

Carrying Carrying
  amt. before Allocation Allocated amt. after
impairment I.L. allocation
(466,667
Inv. property 3,500,000 1.4M x (3.5/10.5)
) 3,033,333
(933,333 6,066,66
PPE - net 7,000,000 1.4M x (7/10.5)
) 7
9,100,00
10,500,000 0

9. Solution:
             
Recoverable amount on date of
  d reversal
 
  c CA if no IL had been recognized previously
 
  b CA on date of reversal
             

The carrying amount of the asset on January 1, 20x8 if no impairment loss

had been recognized previously is computed as follows:

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(20M + 1M – 2M) x 33*/40 + 2M = 17,675,000

*(40 years – 7 years passed) = 33

The carrying amount on January 1, 20x8 after the impairment is computed

as follows:
(15M – 2M) x 33/35** + 2M = 14,257,143

** (40 years – 5 years passed as of 1/1/x6) = 35

Requirement (a): Amount recognized in profit or loss

CA if no IL had been recognized previously 17,675,000
(14,257,143
CA on date of reversal )
Gain on reversal of impairment 3,417,857

Requirement (b): Amount recognized in other comprehensive income

23,000,00
Recoverable amount - 1/1/x8 0

CA if no IL had been recognized previously (17,675,000)

Revaluation surplus 5,325,000

10. C

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PROBLEM 3: EXERCISES

1. Solution:
The value in use is determined as follows:
3,000 x PV ordinary annuity @12%, n=18* = 21,749

*(20 years – 2 years) = 18 years remaining legal/useful life

The impairment loss is computed as follows:

Recoverable amount (Fair value) 27,500
Carrying amount (40,000 x 18/20) 36,000
Impairment loss (8,500)

The entries are as follows:

1/1/x5
Impairment loss 8,500
Accumulated amortization 8,500

12/31/x5
Amortization expense (27,500 ÷ 18) 1,528
Accumulated amortization 1,528

2. Solution:
The value in use is determined as follows:
Revenues (80,000 x PV ordinary annuity @12%,
n=7) 365,101
Residual value [(1M x 10%) x PV of 1 @12%, n=7] 45,235
Value in use 410,335

The impairment loss is computed as follows:

Recoverable amount (Value in use) 410,335
Carrying amount (1M – 100K*) x 12/20 + 100K* 640,000
Impairment loss (229,665)

*1M x 10% = 100,000 residual value

3. Solution: (780,000 – 876,000) = 96,000

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4. Solutions:
             
  CA if no IL had been recognized
e previously 8M (1)
 
  d Recoverable amt. on date of rev. 7M
 
  b CA on date of reversal 6.4M (2)
             

(1)
Carrying amount if no impairment loss had been recognized – 1/1/x3:
(10,000,000 x 8/10) = 8,000,000
(2)
Carrying amount after impairment – 1/1/x3
(8,000,000 x 8/10) = 6,400,000

Requirement (a):
Gain on reversal of impairment = 7M – 6.4M = 600,000

Requirement (b):
Revaluation increase = 0.The new recoverable amount does not exceed the
carrying amount if no impairment loss had been recognized.

Requirement (c):
Depreciation expense = 7M ÷ 10 years = 700,000

5. Solutions:
Case A:
The impairment loss is computed as follows:
Recoverable amount 800,000
Carrying amount 1,080,000
Impairment loss (280,000)

The impairment loss is allocated as follows:

Impairment loss (280,000)
Goodwill 40,000
Excess to be allocated to the other assets (240,000)

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 Carrying Carrying
  amt. before Allocation Allocated amt. after
impairment I.L. allocation
Land 300,000 240K x (3/10.4) (69,231) 230,769
Plant 420,000 240K x (4.2/10.4) (96,923) 323,077
Equipment 240,000 240K x (2.4/10.4) (55,385) 184,615
Machinery 80,000 240K x (.8/10.4) (18,462) 61,538
1,040,000 (240,000) 800,000*

*(Rounded-off)

The carrying amount of the plant after impairment testing is ₱323,077.

Case B:
(Refer to the solution in the preceding case)

The carrying amount of the land after impairment is compared with its fair
value less costs of disposal:

Carrying amount of land after impairment testing, before

adjustment 230,769
Fair value less costs of disposal of land 290,000
Adjustment 59,231

The adjustment is allocated as follows:

Adjusted
Carrying amt. after Allocation of
  Carrying
allocation adjustment
amt. 
Land 230,769 59,231 290,000
Plant 323,077 (33,618) 289,459
Equipment 184,615 (19,210) 165,405
Machinery 61,538 (6,403) 55,135
800,000 - 800,000*

*(Rounded-off)

The carrying amount of the plant after impairment testing is ₱289,459.

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6. Solution:
             
Recoverable amount on date of
  d reversal
 
  c CA if no IL had been recognized previously
 
  b CA on date of reversal
             

The carrying amount if no impairment loss had been recognized

previously is computed as follows:

SYD denominator = 40 x [(40+1)/2] = 820

Historical cost 21,000,000

Residual value (2,000,000)
Depreciable amount 19,000,000
Multiply by: 259* / 820
Accumulated depreciation - 1/1/x8 6,001,220

*(40+39+38+37+36+35+34) = 259

21,000,00
Historical cost 0
(6,001,22
Accumulated depreciation - 1/1/x8
0)
14,998,78
Carrying amount - 1/1/x8
0

The carrying amount after the impairment is computed as follows:

SYD denominator = 35* x [(35+1)/2] = 630

*[40 – 5 years (20x1 to 20x6)] = 35

Fair value - 1/1/x6 15,000,000

Residual value (2,000,000)
Depreciable amount 13,000,000
Multiply by: 69 / 630
Accumulated depreciation - 1/1/x8 1,423,810

Fair value - 1/1/x6 15,000,000

Accumulated depreciation - 1/1/x8 (1,423,810)

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Carrying amount - 1/1/x8 13,576,190

CA if no IL had been recognized previously 14,998,780

CA on date of reversal (13,576,190)

Gain on reversal of impairment 1,422,590

23,000,00
Recoverable amount - 1/1/x8 0

CA if no IL had been recognized previously (14,998,780)

Revaluation surplus 8,001,220

PROBLEM 4: CLASSROOM ACTIVITY

Solutions:

Requirement (a):

The value in use is computed as follows:

Net cash Present
Year PV of P1 factors
flows value
PV of P1 @10%, 0.90909
1 426,000 387,273
n=1 1
PV of P1 @10%, 0.82644
2 386,000 319,008
n=2 6
PV of P1 @10%, 0.75131
3 386,000 290,008
n=3 5
        996,289

The recoverable amount is determined as follows:

Fair value less costs to sell P800,000

Value in use P996,289

Recoverable amount (higher) P996,289

Impairment loss is computed as follows:

Recoverable amount P996,289
Carrying amount (1,200,000)
Impairment loss (P 203,712)

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Requirement (b):
 The impairment loss shall be recognized in profit or loss, unless an
asset included in the CGU was previously revalued. In such case, the
allocated impairment to that asset shall be treated as a reduction to the
revaluation surplus. Any excess impairment shall be recognized in profit
or loss.
 The impairment loss shall be allocated first to goodwill. The excess loss
shall be allocated to the other noncurrent assets of the CGU.

PROBLEM 5: MULTIPLE CHOICE - THEORY

1. D 6. B
2. D 7. C
3. D 8. A
4. D 9. B
5. A 10. A

PROBLEM 6: MULTIPLE CHOICE: COMPUTATIONAL

1. C
Solution:
Recoverable amount - FVLCD 3,000
(7,625
Carrying amount [(10,000 - 500) x 7.5/10] + 500 )
(4,625
Impairment loss )

2. A
Solution:
The recoverable amount is determined as follows:
Value in use (VIN) - PV of expected net future cash flow 300,000
Fair value less costs of disposal (FVLCD) 250,000
Recoverable amount (higher amt.) – VIN 300,000

The impairment loss is determined as follows:

Recoverable amount - Value in use (higher amt.) 300,000
(350,000
Carrying amount (800,000 - 450,000) )
(50,000
Impairment loss )

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3. B
Solution:
The recoverable amount is determined as follows:
Value in use (VIN) - PV of expected net future cash flow 175,000
Fair value less costs of disposal (FVLCD) 150,000
Recoverable amount (higher amt.) – VIN 175,000

The carrying amount as of Aug. 31, 20x3 is determined as follows:

Historical cost 280,000

Residual value (40,000)

Depreciable amount 240,000
Divide by: Estimated useful life 8
Annual depreciation 30,000
Divide by: 12
Monthly depreciation 2,500
Multiply by: No. of mos. from 1/1/x0 to 8/31/x3 44
Accumulated depreciation - 8/31/x3 110,000

Historical cost 280,000

Accumulated depreciation - 8/31/x3 (110,000)

Carrying amount - 8/31/x3 170,000

The impairment loss is determined as follows:

Recoverable amount - Value in use (higher amt.) 175,000
(170,000
Carrying amount - 8/31/x3 )
Impairment loss -

The asset is not impaired because the carrying amount is not less
than the recoverable amount. Therefore, the carrying amount on
August 31, 20x3 (i.e., 170,000) remains unchanged after impairment
testing.
4. B
Solution:
The recoverable amount is determined as follows:
Value in use (VIN) - PV of expected net future cash flow 175,000
Fair value less costs of disposal (FVLCD) 125,000
Recoverable amount (higher amt.) – VIN 175,000

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Recoverable amount - Value in use (higher amt.) 175,000
(200,000
Carrying amount (500,000 - 300,000) )
(25,000
Impairment loss )

5. A
Solution:
The recoverable amount is determined as follows:
Value in use (VIN) - PV of expected net future cash flow 150,000
Fair value less costs of disposal (FVLCD) 135,000
Recoverable amount (higher amt.) – VIN 150,000
The carrying amount as of May 31, 20x3 is determined as follows:
Historical cost 400,000

Residual value (50,000)

Depreciable amount 350,000
Divide by: Estimated useful life 5
Annual depreciation 70,000
Divide by: 12
Monthly depreciation 5,833
Multiply by: No. of mos. from 8/31/x0 to 5/31/x3 33
Accumulated depreciation - 5/31/x3 192,500

Historical cost 400,000

Accumulated depreciation - 5/31/x3 (192,500)

Carrying amount - 5/31/x3 207,500

The impairment loss is determined as follows:

Recoverable amount - Value in use (higher amt.) 150,000
(207,500
Carrying amount - 5/31/x3 )
(57,500
Impairment loss )

The depreciation expense for the month of June 20x3 is computed as

follows:
Carrying amount - 5/31/x3 (recoverable amt.) 150,000
Revised residual value -
Revised depreciable amount 150,000

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Divide by: Remaining useful life (in mos.)
[(5 yrs. x 12 mos.) - 33 mos. passed] 27
Depreciation expense - month of June 20x3 5,556

6. A
Solution:
Accumulated depreciation - 1/1/x1 4,200,000
Impairment loss [3M - (9M - 4.2M)] 1,800,000
Depreciation - 20x1 (3M ÷ 3) 1,000,000
Accumulated depreciation - 12/31/x1 7,000,000

7. C
Solution:
FV less costs of disposal, net of PV of restoration costs
800,000
(given)
Value in use, net of PV of restoration costs (1.2M - 500K) 700,000
Recoverable amount 800,000

Recoverable amount (FVLCD) 800,000

Carrying amount, net of PV of restoration costs (1.6M - 500K) 1,100,000
Impairment loss 300,000

8. C
Solution:
Recoverable amount 650,000
Carrying amount, 12/31/x1 (2.4M - 400K*) 2,000,000
Impairment loss (1,350,000)

*(4M historical cost - 2.4M carrying amount on 1/1/x1) = 1.6M accumulated

depreciation on 1/1/x1 ÷ 4 yrs.) = 400,000 annual depreciation

9. C
Solution:
The depreciation in 20x5 is computed as follows:
(2M x 10%) = 200,000

The impairment loss is computed as follows:

Recoverable amount -
Carrying amt., 12/31/x1 [2M - (2M x 10% x 5 yrs.)] +
50,000* 1,050,000
Impairment loss (1,050,000)

*50,000 disposal costs

10. D
Solution:

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Recoverable amount (FVLCD) (5.2M - 100K) 5,100,000
Carrying amount 5,000,000
Impairment loss None

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