CASE 1.

On January 1, 2017, Mhaya Company acquired a factory equipment at a cost of P300,000. The equipment
is being depreciated using the straight-line method over its projected useful life of 10 years. On
December 31, 2018, a determination was made that the asset’s fair value less cost to sell is P132,000 and
its value in use is P192,000. Assume that this was properly computed and that the recognition of impairment
is warranted. On December 31, 2019, the asset’s recoverable amount was determined to be P222,000 and
management believes that the impairment loss previously recognized should be reversed. You have been
asked to assist Mhaya’s accountant in the application of PAS 36, Impairment of Assets.

REQUIRED:

1. What is the amount of impairment loss should be recognized on December 31, 2018?

2. What is the asset’s carrying value on December 31, 2019, before any impairment recovery?

3. What amount of impairment recovery should be reported in the 2019 income statement?

CASE 2.

D. Mogol Company’s accounts at December 31, 2018 included the following balances:

Machinery (at cost) P273,000

Accumulated depreciation – machinery 144,600
Vehicles (at cost; purchased November 21, 2017) 140,400
Accumulated depreciation – vehicles 58,968
Land (at cost; purchased October 25, 2015) 243,000
Building (at cost; purchased October 25, 2015) 557,160
Accumulated depreciation – building 85,842

Details of machines owned as at December 31, 2018 are as follows:

Machine Commissioning Date Cost Useful Life Residual value

1 October 7, 2015 P129,000 5 years P7,500
2 February 4, 2016 144,000 6 years 9,000

Additional information:
 D. Mogol calculates depreciation to the nearest month and uses straight-line depreciation for all
depreciable assets except vehicles, which are depreciated on the diminishing balance at 40% per
annum.
 D. Mogol’s financial year-end is December 31
 The vehicles account balance reflects the total paid for two identical delivery vehicles, each of
which cost P70,200.
 On acquiring the land and building, D. Mogol estimated the building’s useful life and residual value
at 20 years and P15,000, respectively.

The following transactions occurred from January 1, 2019:

2019
Jan 3 Bought a new machine (machine 3) for a cash price of P171,000. Freight charges of P1,326
and installation costs of P5,274 were paid in cash. The useful life and residual value were
estimated at five years and P12,000, respectively.
2019
Jun 22 Bought a second-hand vehicle for P45,600 cash. Repainting costs of P1,965 and four new
tires costing P1,035 were paid for in cash.

Aug 28 Exchanged machine 1 for office furniture that had a fair value of P37,500 at the date of
exchange. The fair value of machine 1 at the date of exchange was P34,500. The office
furniture originally cost P108,000 and, to the date of exchange, had been depreciated by
P72,300 in the previous owner’s books. D. Mogol estimated the office furniture’s useful life
and residual value at eight years and P1,620, respectively.

Dec 31 Recorded depreciation

2020
Apr 30 Paid for repairs and maintenance on machinery amounting to P2,784.

May 25 Sold one of the vehicles bought on November 21, 2017, for P19,800 cash.
Jun 26 Installed a fence around the property at a cost of P16,500. The fence has an estimated useful
life of 10 years and zero residual value. (Debit the cost to a Land Improvements asset
account).

Dec 31 Recorded depreciation

2021
Jan 5 Overhauled machine 2 at cost of P36,000, after which D. Mogol estimated its remaining life
at one additional year and revised its residual value to P15,000.

Jun 20 Traded-in the remaining vehicle bought on November 21, 2017, for a new vehicle. A trade-in
allowance of P11,100 was received and P69,900 was paid in cash.

Oct 4 Scrapped the vehicle bought on June 22, 2019, as it had been so badly damaged in a traffic
accident that it was not worthwhile repairing it.

Dec 31 Recorded depreciation.

REQUIRED:

4. Machine 3, purchased on January 3, 2019 should be recorded at

5. The second-hand vehicle purchased on June 22, 2019 should be recorded at

6. The office furniture acquired on August 28, 2019 should be recorded at

7. The gain to be recognized on the exchange of machine 1 for office equipment on August 28, 2019
should be

8. The total depreciation expense for 2019 is

9. The gain (loss) to be recognized on the sale of vehicle on May 25, 2020 is

10. The total depreciation expense for 2020 is

11. After the overhaul, machine 2’s revised annual depreciation is

12. What is the cost of the new vehicle acquired on June 20, 2020?

13. The total depreciation expense for 2021 is

CASE 3

The following information pertains to ChangeOil Corp.’s depreciable assets:

A. Machine X was purchased for P150,000 on January 1, 2012. The estimated entire cost was
expensed in the year of acquisition. The estimated useful life of this machine is 15 years with no
residual value.

B. Machine Y cost P525,000 and was acquired on January 1, 2013. On the acquisition date, the
expected useful life was 12 years with no residual value. The straight-line depreciation method
was used. On January 2, 2017, it was estimated that the remaining life of the asset would be 4
years and that there would be a P25,000 residual value.

C. A building was purchased on January 3, 2014, for P3,000,000. The building was expected to
have a useful life of 20 years with no residual value. The straight-line depreciation method was
used. On January 1, 2017, a change was made to the sum-of-the-years’-digits method of
depreciation. No change was made to the estimated useful life and residual value of the building.

14. The adjusting entry on January 1, 2017, relative to machine X should include a credit to:

15. What is the carrying value of machine Y on January 1, 2017?

16. What is the depreciation expense on machine Y for 2014?

17. What is the book value of the building on December 31, 2017?

18. Because the failure to record disposals of property, plant and equipment can significantly affect the
financial statements, the search for unrecorded disposals is essential. Which of the following is not
a procedure to verify disposals?
A. Make inquiries of the management and production personnel about the possibility of disposal
of assets.
B. Review whether newly acquired assets replace existing assets.
C. Test the valuation of fixed assets recorded in prior periods.
D. Review plant modifications and changes in product line, taxes, or insurance coverage.