13 Impairment of Assets

FINANCIAL ACCOUNTING
THEORY & PRACTICE

IMPAIRMENT OF ASSETS
QUIZZER
Impairment of Assets
IMPAIRMENT OF ASSET
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.
5. Explain the meaning of "fair value less cost of disposal".

Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date.
Cost of disposal is an incremental cost directly attributable to the disposal of an asset or cash
generating unit, excluding finance cost and income tax expense.
Essay Questions Page 1

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.

Multiple Choice - Theory

Basic concepts
1. The impairment rules for long-lived assets apply to all of the following, except
A. Land
B. Financial instrument
C. Building currently used in business
D. Minicomputer used to run a production process FA © 2014
2. It is a fall in the market value of an asset so that the recoverable amount is now less than the
carrying amount in the statement of financial position.
A. Amortization C. Depreciation
B. Decline in value D. Impairment TOA © 2013
3. What is impairment of asset?

A. A change in the estimated useful life of an asset.
B. An allocation of cost over the useful life of an asset.
C. A decline in value of an asset so that the recoverable amount is more than carrying
amount.
D. A fall in the market value of an asset so that the recoverable amount is less than carrying
amount. FA © 2014
4. It is the smallest identifiable group of assets that generate cash inflows from continuing use
that are largely independent of the cash inflows from other assets or group of assets.
A. Cash generating unit C. Goodwill
B. Corporate asset D. The entity as a whole TOA © 2013
5. What is a cash generating unit?
A. The group of assets that generate cash inflows from continuing use that are largely
independent of the cash flows from other group of assets.
B. The group of assets that generate cash inflows from continuing use that are not
independent of the cash flows from other group of assets.
C. The largest group of assets that generate cash inflows from continuing use that are
largely independent of the cash flows from other group of assets.
D. The smallest group of assets that generate cash inflows from continuing use that are
largely independent of the cash inflows from other group of assets. FA © 2014
6. These are assets other than goodwill that contribute to the future cash flows of both the cash
generating unit under review and other cash generating units.
A. Corporate assets C. Group
B. Property, plant and equipment D. Cash generating unit FA © 2014
MCQ - Theory Page 7

7. Which of the following statements is incorrect concerning corporate assets?

A. Essentially, corporate assets generate cash inflows independently from other assets.
B. Corporate assets are group or divisional assets such as I head office building, EDP,
equipment or a research center.
C. The recoverable amount of an individual corporate asset I cannot be determined unless
management has decided I to dispose of the asset.
D. If there is an indication that a corporate asset may be I impaired, the recoverable amount
of the cash generating! unit to which the corporate asset belongs is determined and
compared with the carrying amount of the cash generating unit. FA © 2014
Impairment testing
8. Long-lived assets are required to be reviewed for impairment
A. When the asset is fully depreciated.
B. Every year at the end of reporting period.
C. Every three years at the end of reporting period.
D. When circumstances indicate that the carrying amount of an asset might not be
recoverable. FA © 2014
9. When impairment testing a cash generating unit, any corporate assets shall
A. Be separately impairment tested.
B. Not be allocated to cash generating units.
C. Be allocated on a reasonable and consistent basis.
D. Be included in the head office assets or parent's assets and impairment tested along
with that cash generating unit. FA © 2014
10. The internal sources of information indicating possible impairment include all of the following,
except
A. Significant decrease in the market value of the asset.
B. Evidence of obsolescence or physical damage of an asset.
C. Evidence that the economic performance of an asset will be worse than expected.
D. Significant change in the manner or extent in which the asset is used with an adverse
effect on the entity. TOA © 2013
11. The internal sources of information indicating possible impairment include all of the following,
except
A. Obsolescence or physical damage of an asset.
B. Significant decrease in the market value of the asset.
C. Evidence that the economic performance of an asset will be worse than expected.
D. Significant change in the manner or extent in which the asset is used with an adverse
effect on the entity. FA © 2014
MCQ - Theory Page 8

12. The external sources of information indicating possible impairment include all of the following,
except
A. Significant decrease in budgeted net cash flows flowing from the asset.
B. The carrying amount of the net assets of the entity is more than the market capitalization.
C. Significant change in the technological, market, legal or economic environment of the
business in which the asset is employed.
D. An increase in the interest rate or market rate of return on investment which will likely
affect the discount rate used in calculating value in use. FA © 2014
13. When an entity is considering whether to apply an impairment test to an individual asset or
to the cash generating unit to which that asset belongs, which of the following statements is
true?
I. If the individual asset does not generate cash inflows that are largely independent of
those from other assets, the cash generating unit shall be identified.
II. If the individual asset generates an insignificant proportion of the cash inflows of the
entity as a whole, the cash generating unit shall not be identified.
A. I only C. Both I and II
B. II only D. Neither I nor II TOA © 2013
Recognition
14. Which of the following statements is true is relation to recognition of impairment?
I. An impairment loss shall be recognized in profit or loss immediately.
II. After the recognition of an impairment loss, depreciation charge for the future periods
shall be adjusted to allocate the revised carrying amount, less residual value, on a
systematic basis over the remaining useful life.
15. An impairment loss that relates to an asset that has been revalued shall be recognized in
A. Profit or loss
B. Any reserve in equity
C. Opening retained earnings
D. Revaluation surplus that relates to the revalued asset FA © 2014
Measurement
16. An entity shall test an intangible asset with indefinite useful life or an intangible asset not yet
available for use, or goodwill acquired in business combination for impairment
A. Annually C. On acquisition of subsidiary FA © 2014
B. Every 5 years D. If there is an indication of impairment
MCQ - Theory Page 9

17. What is the recoverable amount of an asset?

A. Value in use
B. Fair value less cost of disposal
C. Fair value less cost of disposal or value in use, whichever is lower
D. Fair value less cost of disposal or value in use, whichever is higher 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.
B. The undiscounted value of future cash flows expected to be derived from an asset.
C. The price that would be received to sell an asset in an orderly transaction between
market participants at the measurement date.
D. The price that would be paid to transfer a liability in an orderly transaction between
market participants at the measurement date. FA © 2014
19. Fair value is defined as

I. The price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
II. Present value of estimated future cash flows expected to arise from the continuing use
of an asset and from the disposal at the end of the useful life.
20. What is the best evidence of fair value?

A. Quoted price in an active market for similar asset.
B. Quoted price in an inactive market for similar asset.
C. Quoted price in an active market for identical asset.
D. Quoted price in an inactive market for identical asset. FA © 2014
21. An active market is

I. The market in which transactions for the asset or liability take place with sufficient
regularity and volume to provide pricing information on an ongoing basis.
II. The market with the greatest volume and level of activity for the asset or liability.
B. II only D. Neither I nor II FA © 2014
22. Costs of disposal include all of the following, except

A. Cost of removing the asset C. Legal cost FA © 2014
B. Finance cost D. Stamp and similar transaction tax
MCQ - Theory Page 10

23. Which of the following statements best describes "value in use"?

A. The amount which an entity expects to obtain for an asset at the end of its useful life.
B. The amount of cash or cash equivalents that could currently be obtained by selling an
asset in an orderly disposal.
C. The amount at which an asset could be exchanged between knowledgeable and willing
parties in an arm's length transaction.
D. The present value of estimated future cash flows expected to arise from the continuing
use of an asset and from its ultimate disposal. FA © 2014
24. Value in use of an asset is equal to

A. Discounted future net cash flows from the use of the asset
B. Undiscounted future net cash flows from the use of the asset FA © 2014
C. Discounted future net cash flows from the use and eventual disposition of the asset
D. Undiscounted future net cash flows from the use and eventual disposition of the asset
25. Estimates of future cash flows normally would cover projections over a maximum of
A. Five years C. Fifteen years
B. Ten years D. Twenty years FA © 2014
26. The estimates of future cash flows in calculating value in use include all of the following,
except
A. Cash inflows from the continuing use of the asset
B. Future cost of improving or enhancing the asset's performance
C. Net cash flows from the disposal of the asset at the end of the useful life FA © 2014
D. Cash outflows incurred to generate the cash inflows from the continuing use of the asset
27. When deciding on the discount rate in determining value in use, which factor should not be
taken into account?
A. Pretax discount rate.
B. The time value of money. FA © 2014
C. Risk specific to the asset for which future cash flow estimate has been adjusted.
D. Risk specific to the asset for which future cash flow estimate has not been adjusted.
28. Which of the following statements is incorrect concerning the estimate of future cash flows?
A. Future cash flows do not include income tax receipts or payments.
B. Future cash flows shall be based on reasonable and supportable assumptions.
C. The discount rate used in estimating future cash flows shall be the current rate after tax.
D. Future cash flows shall be based on the most recent budget or financial forecast, usually
up to a maximum of 5 years. FA © 2014

29. Which of the following is not relevant in determining value in use?

A. The time value of money.
B. The carrying amount of the asset.
C. The expected future cash flows from the asset. FA © 2014
D. Expectation about possible variation in the amount and timing of future cash flows.
30. Which of the following terms best describes the higher of fair value less cost of disposal and
value in use?
A. Carrying amount C. Recoverable amount
B. Depreciable amount D. Revalued amount FA © 2014
31. If the fair value less cost of disposal cannot, be determined

A. The asset is not impaired.
B. The net realizable value is used.
C. The recoverable amount is the value in use.
D. The carrying amount of the asset remains the same. FA © 2014
32. If the assets are to be disposed of

A. The asset is not impaired.
B. The recoverable amount is the value in use.
C. The recoverable amount is the carrying value.
D. The recoverable amount is the fair value less cost of disposal. FA © 2014
33. What is the allocation of an impairment loss recognized for a cash generating unit?
A. Across the assets of the unit based on fair value.
B. Across the assets of the unit based on carrying amount.
C. First, to any goodwill, and the balance to the other assets prorata based fair value.
D. First, to any goodwill, and the balance to the other assets prorata based on carrying
amount FA © 2014
34. Which of the following statements best describes the term "impairment loss"?
A. The removal of an asset from an entity's statement of financial position. FA © 2014
B. The systematic allocation of an asset's cost less residual value over its useful life.
C. The amount by which the recoverable amount of an asset exceeds its carrying amount.
D. The amount by which the carrying amount of an asset exceeds its recoverable amount.

35. How is the loss calculated for an impaired asset?

A. Fair value less carrying amount.
B. Cash outflows needed to obtain cash inflows.
C. Future discounted cash flows less carrying amount.
D. Future undiscounted cash flows less carrying amount. FA © 2014
36. Impairment loss for productive asset shall be reported

A. As an extraordinary item.
B. As a change in accounting estimate.
C. As a component of discontinued operation.
D. As a component of income from continuing operations. FA © 2014
37. An entity is considering to apply an impairment test to an individual asset or to the cash
generating unit to which the asset belongs. Which of the following statements is true?
A. If the individual asset generates a significant proportion of cash inflows of the entity as a
whole, the cash generating unit should not be identified.
B. If the individual asset does not generate cash inflows that are largely independent from
other assets, the cash generating unit should be identified.
C. If the individual asset generates an insignificant proportion of the cash inflows of the
entity as a whole, the cash generating unit should not be identified.
D. All of these statements are true. FA © 2014
38. Which of the following statements is correct about the carrying amount of long-lived asset
after an impairment loss has been recognized?
I. The reduced carrying amount of the asset may be increased in subsequent years if the
impairment loss has been recovered.
II. The reduced carrying amount of the asset represents the amount that should be
depreciated over the remaining useful life of the asset.
39. All of the following statements are true with regard to impairment of asset, except
A. If impairment indicators are present, the entity must conduct an impairment test.
B. If recoverable amount is higher than carrying amount, no impairment loss is recognized.
C. If the recoverable amount is lower than carrying amount, an impairment loss is
recognized.
D. The impairment test compares the carrying amount with the lower of fair value less cost
of disposal and value in use. FA © 2014

Reversal of impairment
40. Which of the following statements is true concerning reversal of an impairment loss?
I. The increased carrying amount of the asset due to a reversal of an impairment loss shall
not exceed the carrying amount that would have been determined had no impairment
loss been recognized in the prior years.
II. An impairment loss recognized for goodwill shall not be reversed in a subsequent period.
41. Which of the following statements is true concerning the reversal of an impairment loss?
I. The reversal of the impairment loss shall recognized immediately as an adjustment of
the opening balance of retained earnings.
II. The carrying amount of the asset shall be increased to the new recoverable amount.
42. Which of the following statements is true concerning reversal of an impairment loss?
I. The increased carrying amount of the asset due to a reversal of an impairment loss shall
not exceed the carrying amount that would have been determined had no impairment
loss been recognized in the prior years.
II. An impairment loss recognized for goodwill may be reversed in a subsequent period.
Journal entry
43. When an entity determined that an equipment used in operations has suffered impairment in
value, the entry to record the impairment should
A. Include a credit to equipment.
B. Include a credit to accumulated depreciation.
C. Not be made if the equipment is still being used.
D. Recognize extra depreciation expense for the period. FA © 2014

Multiple Choice – Problems: Basic Problems

Impairment loss
1. On January 1, 2013, Laity Company purchased a patent with a cost of P5,200,000 and a
useful life of ten years. On December 31, 2014, the entity determined that impairment
indicators were present'. The fair value less cost of disposal of the patent was estimated to
be P3,600,000. The, value in use is estimated to be P3,800,000. What amount should be
reported as impairment loss for 2014?
A. 0 C. 560,000
B. 360,000 D. 880,000 FA © 2014
2. At the beginning of current year, Uptown Company acquired an intangible asset for
P3,000,000. The intangible asset has an estimated useful life of 10 years. At the current 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
3. Listless Company acquired equipment on January 1, 2013 for P5,000,000. The equipment
had a 10-year useful life and no residual value. Cm December 31, 2014, the following
information was obtained:
Expected value of undiscounted cash flows 3,600,000
Fair value estimated with in-use premise 3,700,000
Fair value estimated with in-exchange premise 3,500,000
What amount should be recognized as impairment loss for 2014?
A. 0 C. 400,000
B. 300,000 D. 500,000 FA © 2014
4. On January 1, 2014, Leah Company owned a machine having a carrying amount of

P2,400,000. The machine was purchased four years earlier for P4,000,000. The straight line
depreciation is used. During December 2014, the entity determined that the machine suffered
permanent impairment and will not be economically useful after December 31, 2014. The
entity sold the machine for P650,000 on January 5,2015. What amount should be recognized
as impairment loss in 2014?
A. 0 C. 1,750,000
B. 1,350,000 D. 2,000,000 FA © 2014
MCQ - Problems Page 15

5. On January 1, 2010, Walton Company purchased a machine for P2,000,000 and established
an annual straight line depreciation rate of 10%, with no residual value. During 2014, the
entity determined that the machine will not be economically useful in production process after
December 31, 2014. The entity estimated that the machine had no residual value on
December 31, 2014 and would be disposed of in early 2015 at a cost of P50,000. In the
income statement for the year ended December 31, 2014, what amount of impairment loss
should be reported for the machine?
A. 50,000 C. 1,050,000
B. 1,000,000 D. 1,250,000 P1 © 2014
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
7. On December 31,2014, Zee Company has an equipment with the following cost and
accumulated depreciation:
Equipment 9,000,000
Accumulated depreciation 3,000,000
Due to obsolescence and physical damage, the equipment is found to be impaired. On
December 31,2014, the entity has determined the following information related to the
equipment:
Fair value less cost of disposal 4,500,000
Value in use or discounted net cash inflows 4,000,000
What amount should be reported as impairment loss for 2014?
A. 0 C. 1,500,000
B. 500,000 D. 2,000,000 P1 © 2014
8. During December 2014, Bubba Company determined that there had been a significant
decrease in market value of an equipment used in the manufacturing process. On December
31,2014, the entity compiled the following information:
Original cost of equipment 5,000,000
MCQ – Problems Page 16

Expected undiscounted net future cash inflows related to the

continued use and eventual disposal of the equipment 1,750,000
Fair value of equipment 1,250,000
What amount of impairment loss should be reported in the income statement for the year
ended December 31, 2014?
A. 250,000 C. 3,250,000
B. 750,000 D. 3,750,000 P1 © 2014
9. Synthia Company, a clothing manufacturer, purchased a sewing machine for P2,000,000 on

July 1, 2011. The machine had a 10-year life, a PI00,000 residual value, and was depreciated
using the straight line method. On January 1, 2014, a test for impairment indicated that the
undiscounted cash flows from the sewing machine are less than carrying amount. The
machine's fair value on January 1,2014 is P600,000. What is the loss on impairment?
A. 830,000 C. 950,000
B. 925,000 D. 1,300,000 FA © 2014
10. Silver Company had an equipment with a carrying amount of P450,000 at year-end. The
following information was available at year-end:
Expected undiscounted net cash flows 420,000
Expected discounted net cash flows 400,000
Fair value, using similar asset 415,000
Fair value, assuming the asset is sold stand-alone 428,000
What is the impairment loss that should be reported in the income statement for the current
year?
A. 22,000 C. 35,000
B. 30,000 D. 50,000
11. Seafarer Company has an oil platform in the sea. The entity has to decommission the platform
at the end of the useful life, and a provision was set up at the commencement of production.
The carrying amount of the provision for decomissioning is P5,000,000. The entity has
received an offer of P8,000,000 for the rights to the platform which reflects the fact that
Seafarer Company has to decommission it at the end of the useful life. Disposal costs would
be P500,000. The value in use of the oil platform is P12,000,000 ignoring the
decommissioning cost. The carrying amount of the oil platform is P15,000,000. What amount
should be recognized as impairment loss for the current year in relation to the oil platform?
A. 2,000,000 C. 3,000,000
B. 2,500,000 D. 7,500,000 FA © 2014

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

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

What is the depreciation expense that should be recognized for the year ended December
31, 2014?
A. 750,000 C. 812,500
B. 787,500 D. 825,000 P1 © 2014
Accumulated depreciation
18. Gei Company determined that, due to obsolescence, equipment with an original cost of
P9,000,000 and accumulated depreciation on January 1, 2014, of P4,200,000 had suffered
permanent impairment, and as a result should have a carrying amount of only P3,000,000 as
of the beginning of the year. In addition, the remaining useful life of the equipment was
reduced from 8 years to 3. In the December 31, 2014 statement of financial position, what
amount should be reported as accumulated depreciation?
A. 1,000,000 C. 6,000,000
B. 5,200,000 D. 7,000,000 P1 © 2014
Carrying amount
19. Cynosure Company has an equipment with carrying amount of P1,600,000 on December
31,2014 after recording depreciation for 2014. The following information is available on
December 31,2014 relative to the equipment:
Fair value of similar equipment 1,400,000
Discounted future cash flows 1,300,000
Undiscounted future cash flows 1,350,000
At what amount should the equipment be reported on December 31, 2014?
A. 1,300,000 C. 1,400,000
B. 1,350,000 D. 1,600,000 FA © 2014
20. On January 1, 2011, Roundabout Company purchased a machine for P800,000 and
established an annual depreciation charge of P100,000 over an eight-year life. During 2014,
after issuing the 2013 financial statements, the entity concluded that the machine suffered
permanent impairment of the operational value, and P200,000 is a reasonable estimate of
the amount expected to be recovered through use of the machine for the period January 1,
2014 through December 31, 2018. What should be reported as carrying amount of the
machine on December 31, 2014?
A. 0 C. 160,000
B. 100,000 D. 400,000 FA © 2014
21. On July 1,2011, Rey Company purchased computer equipment at a cost of P3,600,000. The
equipment had a six-year life with no residual value and was depreciated by the straight line.
On January 1,2014, the entity determined that this equipment had been permanently

impaired, and that P700,000 could be recovered over the remaining useful life of the
equipment. What is the carrying amount of the equipment on December 31,2014?
A. 0 C. 700,000
B. 500,000 D. 1,500,000 P1 © 2014
22. In January 2012, Winn Company purchased equipment at a cost of P5,000,000. The
equipment had an estimated residual value of PI,000,000, an estimated 8-year useful life,
and was being depreciated by the straight line method. Two years later, it became apparent
that this equipment suffered a permanent impairment of value. In January 2014, management
determined the carrying amount should be only PI,750,000 with a 2-year remaining useful
life, and the residual value should be reduced to P250,000. On December 31, 2014, what is
the carrying amount of the equipment?
A. 1,000,000 C. 1,750,000
B. 1,500,000 D. 3,500,000 P1 © 2014
23. Scarbrough Company had purchased equipment for P2,800,000 on January 1,2011. The
equipment had an 8-year life and residual value of P400,000. The entity depreciated the
equipment using the straight line method. In August 2014, the entity questioned the
recoverability of the carrying amount of this equipment. On August 31,2014, the undiscounted
expected net future cash inflows related to the continued use and eventual disposal of the
equipment amounted to P1,600,000. The equipment's fair value on August 31, 2014 is
PI,500,000. After any loss on impairment has been recognized, what is the carrying amount
of the equipment?
A. 1,300,000 C. 1,600,000
B. 1,500,000 D. 1,700,000 FA © 2014
24. Bronze Company operates a production line which is treated as a cash generating unit. At
year-end, the carrying amounts of the noncurrent assets of this cash generating unit are:
Intangibles-goodwill 1,100,000
Tangibles-plant and machinery 2,200,000
At year-end, the recoverable amount of the production line is estimated at P2,700,000.
What are the revised carrying amounts of the intangible and tangible noncurrent assets,
respectively?
A. 500,000 and 2,200,000 C. 900,000 and 1,800,000
B. 800,000 and 1,900.000 D. 1,100,000 and 1,600,000 FA © 2014

Gain on reversal of impairment

25. Lobo Company reported an impairment loss of P2,000,000 in 2013. This loss was related to
an item of property, plant and equipment which was acquired on January 1,2012 with cost of
P10,000,000, useful life of 10 years and no residual value. On December 31,2013, the entity
reported this asset at P6,000,000 which is the fair value on such date. On December
31,2014, the entity determined that the fair value of the impaired asset had increased to
P7,500,000. The straight line method is used in recording depreciation.
What amount of gain on reversal of impairment should be reported in the income statement
for 2014?
A. 0 C. 1,750,000
B. 1,500,000 D. 2,250,000 P1 © 2014
26. Tausug Company reported the following calculation relating to an impairment loss suffered
on December 31,2014:
Goodwill Net assets
Carrying amount 3,000,000 9,000,000
Impairment loss (3,000,000) (2,000,000)
Adjusted carrying amount - 7,000,000
There has been a favorable change in the estimate of the recoverable amount of the net
assets. The recoverable amount is now P8,000,000 on December 31,2015. The carrying
amount of the net assets would have been P7,200,000 on December 31,2015 if there was
no impairment loss recognized on December 31,2014. Assets are depreciated at 20% of
reducing balance.
What gain on reversal of impairment should be recognized in 2015?
A. 0 C. 1,600,000
B. 1,000,000 D. 2,400,000 FA © 2014
Depreciation & impairment loss

27. On January 1, 2010, Waiver Company purchased a machine for P2,000,000 and established
an annual straight line depreciation rate of 10%, with no residual value. During 2014 the entity
determined that the machine will not be economically useful in the production process after
December 31, 2014.
The entity estimated that the machine had no residual value on December 31, 2014, and
would be disposed of in early 2015 atacostofP50,000.
In the income statement for the year ended December 31, 2014, what amount and type of
charge should be reported for the machine?
FA © 2014 A. B. C. D.
Depreciation 0 200,000 200,000 1,200,000
Impairment loss 1,250,000 1,000,000 1,050,000 50,000

Comprehensive
Questions 28 & 29 are based on the following information. P1 © 2014
Zambia Company purchased four convenience store buildings on January 1, 2008 for a total of
P25,000,000. The buildings have been depreciated using the straight-line method with a 20-year
useful life and 10% residual value. On January 1, 2014, the entity has converted the buildings into
a hotel and restaurant. Because of the change in the use of the buildings, the entity is evaluating
the buildings for possible impairment. The entity estimated that the buildings have a remaining
useful life of 10 years, that their residual value will be zero, that net cash inflows from the buildings
will total P1,500,000 per year, and that the current fair value of the four buildings totals PI
0,000,000. The appropriate discount rate is 12%. The present value of an ordinary annuity of 1 at
12% for 10 periods is 5.65.
28. What amount of impairment loss should be recognized for 2014?

A. 0 C. 8,250,000
B. 7,500,000 D. 9,775,000
29. What is the depreciation of the buildings for 2014?'

A. 762,750 C. 900,000
B. 847,500 D. 1,000,000

On January 1,2014, Zimbabwe Company has a machinery with cost of P5,000,000 and
accumulated depreciation of P1,500,000. The machinery was acquired on January 1, 2011 and
had been depreciated using the straight line method with useful life of 10 years and no residual
value.On January 1,2014, the entity has properly tested the machinery to be impaired. The
machinery has a remaining life of 5 years and is expected to generate undiscounted net cash
inflows of P800,000 per year. The fair value of the machinery on January 1,2014 is P3,000,000.
The appropriate discount rate is 8%. The present value of an ordinary annuity of 1 at 8% for 5
periods is 3.99.
30. What amount should be recognized as an impairment loss for 2014?

A. 0 C. 500,000
B. 308,000 D. 808,000
31. What is the depreciation of the machinery for 2014?

A. 300,000 C. 600,000
B. 319,200 D. 638,400


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.
December 31, 2014 December 31, 2015
Fair value less cost of disposal 8,100,000 8,400,000
Value in use 8,550,000 8,200,000
32. What is the impairment loss for 2014?

A. 0 C. 1,800,000
B. 1,350,000 D. 2,450,000
33. What is the gain on reversal of impairment for 2015?

A. 0 C. 400,000
B. 250,000 D. 800,000
Questions 34 thru 36 are based on the following information. FA © 2014

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

A. 0 C. 1,800,000
B. 1,350,000 D. 2,450,000
35. What is the gain on reversal of impairment for 2015?

A. 0 C. 800,000
B. 400,000 D. 1,200,000
36. What is the depreciation for 2016?

A. 950,000 C. 1,050,000
B. 1,025,000 D. 1,100,000

Multiple Choice – Problems: Cash Generating Unit

Impairment loss - goodwill
37. On July 1, 2014, Nicole Company acquired Jones Company in a business combination. As a
result of the combination, the following amounts of goodwill were recorded for each of the
three reporting units of the acquired entity:
Retailing 300,000
Service 200,000
Financing 400,000
Near the end of 2014, a new major competitor entered the entity's market and the entity was
concerned that this might cause a significant decline in the value of goodwill. Accordingly,
the entity computed the implied value of the goodwill for the tnree major reporting units on
December 31,2014 as follows:
Retailing 250,000
Service 100,000
Financing 600,000
What is the amount of impairment of goodwill that should be recorded on December 31,
2014?
A. 0 C. 150,000
B. 100,000 D. 250,000 FA © 2014
Impairment loss - allocated

38. Palawan Company has determined that the electronics division is a cash generating unit. The
entity calculated the value in use of the division to be P8,000,000. The assets of the cash
generating unit at carrying amount are as follows:
Building 5,000,000
Equipment 3,000,000
Inventory 2,000,000
10,000,000
The entity has also determined that the fair value less cost of disposal of the building is
P4,500,000. What is the impairment loss to be allocated to the equipment?
A. 400,000 C. 900,000
B. 600,000 D. 1,000,000 P1 © 2014
39. One of the cash generating units of Sanmig Company is the production of liquor. On
December 31,2014, the entity believed that the assets of the cash generating unit (CGU) are
impaired based on an analysis of economic indicators.
The assets and liabilities of the cash generating unit at carrying amount on December 31,
2014 are:

Cash 4,000,000
Accounts receivable 6,000,000
Allowance for doubtful accounts 1,000,000
Inventory 7,000,000
Property, plant and equipment 22,000,000
Goodwill 3,000,000
Accounts payable 2,000,000
Loans payable 1,000,000
The entity determined that the value in use of the cash generating unit isP30,000,000.
The accounts receivable are considered collectible, except those considered doubtful.
What is the impairment loss to be allocated to property, plant and equipment?
A. 2,400,000 C. 4,000,000
B. 2,880,000 D. 4,200,000 P1 © 2014
40. Brandy Company has two cash generating units. On December 31, 2014, the carrying
amounts of the assets of one cash generating unit are:
Inventory 200,000
Accounts receivable 300,000
Plant and equipment 6,000,000
Patent 850,000
Goodwill 100,000
The accounts receivable are regarded as collectible and the fair value less cost of disposal
of the inventory is equal to the carrying amount. The patent has a fair value less cost of
disposal of P750,000. On December 31,2014, the entity undertook impairment testing of the
cash generating unit and determined the value in use of the unit at P4,050,000.
What is the impairment loss to be allocated to the plant and equipment?
A. 560,000 C. 700,000
B. 600,000 D. 800,000 P1 © 2014
41. Uranus Company has various cash generating units. On December 31,2014, one cash
generating unit has the following carrying amount of assets:
Cash 600,000
Inventory 1,400,000
Land 2,500,000
Plant and equipment 9,000,000
Accumulated depreciation 1,500,000)
Goodwill 1,000,000
Carrying amount 13,000,000

As part of the impairment testing procedure, the management determined the value in use of
the cash generating unit at P8,500,000. The fair value less cost of disposal for the inventory
is greater than the carrying amount. What is the impairment loss to be allocated to plant and
equipment?
A. 2,625,000 C. 3,500,000
B. 3,375,000 D. 4,500,000 P1 © 2014
Revised carrying amounts

42. Bronze Company operates a production line which is treated as a cash generating unit for
impairment review purposes. On December 31,2014, the carrying amounts of the noncurrent
assets are as follows:
Goodwill 1,100,000
Machinery 2,200,000
On December 31,2014, the value in use of the production line is estimated at P2,700,000.
What are the revised carrying amounts of the goodwill and machinery, respectively?
A. 500,000 and 2,200,000 C. 900,000 and 1,800,000
B. 800,000 and 1,900,000 D. 1,100,000 and 1,600,000 P1 © 2014
Comprehensive
At the beginning of current year, Jolo Company acquired all the assets and liabilities of another
entity. The acquiree has a number of operating divisions, including one whose major industry is
the manufacture of toy train. The toy train division is regarded as a cash generating unit. In paying
P20,000,000 for the net assets of the acquiree, Jolo calculated that it had acquired goodwill of
P2,400,000. The goodwill was allocated to each of the divisions, and the assets and liabilities
acquired are measured at fair value at acquisition date. At year-end, the carrying amounts of the
assets of the toy train division were:
Building 2,000,000
Inventory 1,500,000
Trademark 1,000,000
Goodwill 500,000
There is a declining interest in toy train because of the aggressive marketing of computer-based
toys. The entity measured the value in use of the toy train division at year-end at P3,600,000.
43. What is the impairment loss on goodwill?
A. 0 C. 250,000
B. 140,000 D. 500,000
44. What is the impairment loss to be allocated to the building?
A. 300,000 C. 500,000
B. 400,000 D. 900,000

Questions 45 thru 47 are based on the following information. P1 © 2014

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

A. 0 C. 1,750,000
B. 1,250,000 D. 3,000,000
46. What is the impairment loss on goodwill?

A. 0 C. 500,000
B. 110,000 D. 610,000
47. What is the impairment loss on customer list?

A. 0 C. 203,000
B. 178,000 D. 243,000

ANSWER KEY THEORY PROBLEMS

1.B 26.B 1.B 26.C
2.D 27.C 2.B 27.C
3.D 28.C 3.B 28.C
4.A 29.B 4.B 29.D
5.D 30.C 5.C 30.B
6.A 31.C 6.B 31.D
7.A 32.D 7.C 32.B
8.D 33.D 8.B 33.D
9.C 34.D 9.B 34.B
10.A 35.A 10.A 35.C
11.B 36.D 11.B 36.C
12.C 37.D 12.D 37.C
13.C 38.C 13.B 38.C
14.C 39.D 14.A 39.B
15.D 40.C 15.B 40.B
16.A 41.B 16.B 41.A
17.D 42.A 17.C 42.A
18.C 43.B 18.D 43.D
19.A 19.C 44.B
20.C 20.C 45.B
21.A 21.B 46.C
22.B 22.A 47.C
23.D 23.B
24.C 24.A
25.A 25.C
Answer Key Page 29

Answer Key Page 30

ANSWER EXPLANATION
1. Answer is (B).
Acquisition cost 5,200,000
Amortization for 2013 & 2014 (5,200,000 / 10 x 2) (1,040,000)
Carrying amount – 12/31/2014 4,160,000
Value in use – higher than fair value 3,800,000
Impairment loss 360,000
2. Answer is (B).
Intangible asset – 1/1/2014 3,000,000
Amortization for 2014 (3,000,000 / 10) (300,000)
Carrying amount – 12/31/2014 2,700,000
Value in use (300,000 x 7.11) 2,133,000

Impairment loss (567,000)
3. Answer is (B).
Cost - January 1,2013 5,000,000
Accumulated depreciation (5,000,000 /10 x 2) (1,000,000)
Carrying amount - December 31, 2014 4,000,000
Recoverable amount equal to fair value with in-use premise 3,700,000
4. Answer is (B).
Carrying amount - January 1, 2014 2,400,000
Depreciation for 2014 (1,600,000/4) 400,000
Carrying amount - • December 31,2014 2,000,000
Recoverable amount equal to the sale price 650,000
Impairment loss for 2014 1,350,000
5. Answer is (C).
Cost - January 1,2010 2,000,000
Accumulated depreciation - 12/31/2014 (200,000 x 5) 1,000,000
Estimated cost of disposal 50,000
Impairment loss 1,050,000
Answer Explanation & Solutions Page 31

6. Answer is (B).
Annual cash inflows 700,000
Multiply by PV of an ordinary annuity of 1 at 8% for 15 periods 8.56
Value in use 5,992,000
The value in use is the recoverable amount because it is higher than the fair value of
P5,300,000.
Cost - January 1,2011 10,000,000
Accumulated depreciation – Dec. 31, 2014 (10,000,000/25 x 4) 1,600,000
Recoverable amount 5,992,000
7. Answer is (C).
Fair value - higher than value in use 4,500,000
Impairment loss (1,500,000)
If the recoverable amount of an asset is lower than the carrying amount, the difference is
recognized as an impairment loss. The recoverable amount is equal to the value in use or
fair value less cost of disposal, whichever is higher. The impairment is recorded as follows:
8. Answer is (B).
Cost of equipment 5,000,000
The net future cash inflows are not used in determining impairment loss because the inflows
are undiscounted.
9. Answer is (B).
Cost 2,000,000
Accum. depr’n - January 1, 2014 (2,000,000-100,000/10 x 2.5) 475,000
Carrying amount - January 1,2014 1,525,000
Fair value 600,000

10. Answer is (A).

Impairment loss (450,000 – 428,000) 22,000
11. Answer is (B).

Offer price 8,000,000
Disposal cost (500,000)
Carrying amount of provision (5,000,000)
Adjusted value in use 7,000,000
Carrying amount of old platform 15,000,000
Carrying amount of provision (5,000,000)
Adjusted carrying amount 10,000,000
Recoverable amount – equal to fair value less cost of disposal
being the higher amount 7,500,000
12. Answer is (D).

Trademark 6,000,000
Present value of indefinite cash flows (200,000/10%) 2,000,000
Patent 3,000,000
Present value of cash flows (500,000x3.79) 1,895,000
Total impairment loss (4,000,000 + 1,105,000) 5,105,000
13. Answer is (B).

Cost of equipment 5,000,000
The net future cash inflows are not used in determining impairment loss because the inflows
are undiscounted.
14. Answer is (A).

Trademark 2,000,000
Value in use (120,000 / 8%) 1,500,000

Patent 6,000,000
Amortization for 2014 (6,000,000 / 5) 1,200,000
Carrying amount – 12/31/2014 4,800,000
Value in use (1,000,000 x 3/31) 3,310,000
15. Answer is (B). From August 21. 3011 to May 31, 2014 is a period of 33 months. Thus, the
remaining life of the machine is 27 months, 60 months original life minus 33.
Depreciation for June 2014 (1,350,000 / 27 months) 50,000
Cost 3,200,000
Accum. depn. – 5/31/2014 (3,200,000 – 500,000) x 33/60 1,485,000
Carrying amount – 5/31/2014 1,715,000
16. Answer is (B).

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

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

18. Answer is (D).

Cost 9,000,000
Accumulated depreciation - January 1, 2014 4,200,000
Expected recoverable amount 3,000,000
Adjusted accum. depr’n, Jan. 1, 2014 (4,200,000 + 1,800,000) 6,000,000
Depreciation for 2014 (3,000,000 / 3) 1,000,000
Accumulated depreciation - December 31,2014 7,000,000
19. Answer is (C).

Recoverable amount equal to fair value which is higher than value in use 1,400,000
20. Answer is (C).

Cost, January 1, 2011 800,000
Accumulated depreciation, Dec. 31, 2013 (100,000 x 3) 300,000
Carrying amount, Dec. 31, 2013 500,000
Recoverable amount 200,000
The loss is recorded as follows:
Accumulated depreciation 300,000
Cost 800,000
Accumulated depreciation (300,000 + 300,000) 600,000
Recoverable amount, January 1, 2014 200,000
Depreciation for 2014 (200,000 / 5) 40,000
Carrying amount, December 31, 2014 160,000
21. Answer is (B).

Recoverable amount - January 1, 2014 700,000
Depreciation for 2014 (700,000 / 3.5) 200,000
Carrying amount - December 31,2014 500,000

22. Answer is (A).

Depreciation for 2014 (1,750,000 - 250,000 / 2) 750,000
Carrying amount - December 31,2014 1,000,000
23. Answer is (B).

Cost - January 1,2011 2,800,000
Accum. depr’n - August 31, 2014 (2,400,000 / 96 months x 44) 1,100,000
Carrying amount - August 31,2014 1,700,000
Impairment loss ( 200,000)
Fair value-August 31,2014 1,500,000
24. Answer is (A).

Carrying amount of cash generating unit 3,300,000
The impairment loss is applied against the goodwill only. Thus, goodwill has an adjusted
balance of P500,000 and the balance of the machinery remains the same at P2,200,000.
25. Answer is (C).

Fair value - January 1,2014 6,000,000
Depreciation for 2014 (6,000,000 / 8) 750,000
Carrying amount - 12/31/2014-with impairment 5,250,000
Cost - January 1, 2012 10,000,000

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

Depreciation for 2015 (20%) x 7,000,000) (1,400,000)
Carrying amount - 12/31/2015 with impairment 5,600,000

Carrying amount - 12/31/2015 assuming no impairment 7,200,000

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

Depreciation for 2015 (10% x 2,000,000) 200,000
Cost – 1/2/2010 2,000,000

Accum. depn. – 12/31/2014 (200,000 x 5) 1,000,000
Carrying amount – 12/31/2014 1,000,000
Estimated cost of disposal 50,000
28. Answer is (C).

Fair value 10,000,000
Present value of net cash inflows (1,500,000 x 5.65) 8,475,000
Buildings 25,000,000
Accumulated depreciation (22,500,000 / 20 x 6) 6,750,000
Fair value - higher than value in use 10,000,000
29. Answer is (D). Depreciation for 2014 (10,000,000 /10) 1,000,000
30. Answer is (B).

Fair value 3,000,000
Present value of net cash inflows (800,000 x 3.99) 3,192,000
Machinery 5,000,000
Accumulated depreciation 1,500.000
Carrying amount - January 1,2014 3,500,000
Present value of net cash inflows or value in use - higher 3,192,000
31. Answer is (D). Depreciation for 2014 (3,192,000 / 5 years) 638,400

32. Answer is (D).

Cost-January 1,2014 11,000.000
Accumulated depreciation (11,000,000 /10) (1,100,000)
Value in use - higher than fair value 8,550,000
33. Answer is (D).

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

Cost – 1/1/2014 11,000,000
Accum. depn. (11,000,000 / 10) (1,100,000)
Carrying amount – 12/31/2014 9,900,000
Value in use – higher than fair value 8,550,000
35. Answer is (C).

Carrying amount – 1/1/2014 8,550,000
Depreciation for 2015 (8,550,000 / 9) (950,000)
Carrying amount – 12/31/2015 with impairment 7,600,000
Cost – 1/1/2014 11,000,000

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

36. Answer is (C).

Depreciation for 2016 (8,400,000 / 8) 1,050,000
37. Answer is (C).

Goodwill Implied value Loss
Retailing 300,000 250,000 50,000
Service 200,000 100,000 100,000
Financing 400,000 600,000 - .
Total impairment loss 150,000
Goodwill impairment is determined at the level of the individual reporting unit and not at the
entity level. Thus, no loss is recognized for the Financing unit because the implied value of
goodwill exceeds the carrying amount.
38. Answer is (C).

Allocation of impairment loss

Building (5/10x2,000,000) 1,000,000
Equipment (3/10x2,000,000) 600,000
Inventory (2/10x2,000,000) 400,000
2,000,000
Observe that after allocating the PI,000,000 loss to the building, the carrying amount of the
building would be P4,000,000 which is lower than its fair value of P4,500,000. PAS 36,
paragraph 105, provides that the carrying amount of an asset shall not be reduced below the
highest of fair value less cost of disposal, value in use and zero. The amount of impairment
loss that would otherwise have been allocated to the asset shall be reallocated prorata to the
other noncash assets of the cash generating unit.
Accordingly, only P500,000 loss is allocated to the building and the balance of P500,000 is
reallocated to the equipment and inventory prorata.
Building Equipment Inventory
Allocated loss 1,000,000 600,000 400,000
Reallocated loss: ( 500,000)
(3/5 x 500,000) 300,000
(2/5x500,000) . 200,000 .
Impairment loss 500,000 900,000 600,000

39. Answer is (B).

Cash 4,000,000
Accounts receivable - net 5,000,000
Inventory 7,000,000
Property, plant and equipment - net 18,000,000
Goodwill 3,000,000
Carrying amount of CGU 37,000,000
Value in use- 30,000,000
Impairment loss allocated to goodwill 3,000,000
Remaining impairment loss 4,000,000
Carrying amount Fraction Loss
Inventory 7,000,000 7/25 1,120,000
Property, plant and equipment 18,000,000 18/25 2,880,000
25,000,000 4,000,000
The impairment loss is not allocated to the accounts receivable because the accounts are
considered collectible except those doubtful.
Carrying amount of CGU
Observe that the liabilities of the cash generating unit are ignored in determining the carrying
amount of the CGU.
PAS 36, paragraph 76, provides that the carrying amount of a cash generating unit includes
"the carrying amount of only those assets that can be attributed directly or allocated on a
reasonable and consistent basis to the cash generating unit" and shall generate the future
cash inflows used in determining the value in use of the cash generating unit
Paragraph 76 further provides that the carrying amount of the cash generating unit does not
include the carrying amount of any recognized liability, unless the recoverable amount of the
cash generating unit cannot be determined without consideration of this liability.
The reason is stated in PAS 36, paragraph 43, which mandates that to avoid double counting,
estimates of future cash flows do not include cash outflows that relate to obligations that have
been recognized as liabilities by the cash generating unit.
40. Answer is (B).

Inventory 200,000
Accounts receivable 300,000
Plant and equipment (6,000,000-2,600,000) 3,400,000
Patent 850,000
Goodwill 100,000


Impairment loss allocated to goodwill 100,000
Remaining impairment loss 700,000
Plant Patent
Allocated loss
(3,400 / 4,250 x 700,000) 560,000
( 850/4,250 x 700,000) 140,000
Reallocated loss 40,000 ( 40,000)
600,000 100,000
The patent shall not be reduced to an amount below the fair value less cost of disposal of
P750,000. No impairment loss is allocated to accounts receivable and inventory because
the accounts are considered collectible and the fair value less cost of disposal of the inventory
is equal to the carrying amount.
41. Answer is (A).

Impairment loss allocated to goodwill 1,000,000
Remaining impairment loss 3,500,000
Land 2,500,000 25/100 875,000
Plant and equipment 7,500,000 75/100 2,625,000
10,000,000 3,500,000
No impairment loss is allocated to inventory because the fair value less cost of disposal of
inventory is higher than carrying amount.
42. Answer is (A).

The impairment loss is applied against the goodwill only. Thus, goodwill has an adjusted
balance of P500,000 and the balance of the machinery remains the same at P2,200,000.
43. Answer is (D).


Impairment loss allocated to goodwill 500,000

Remaining impairment loss 900,000
The carrying amount of goodwill is fully recognized as impairment loss.
PAS 36, paragraph 104, provides that when an impairment loss is recognized for a cash
generating unit, the loss is allocated to the assets of the unit in the following order:
a. First, to the goodwill, if any.
b. Then, to all other noncash assets of the unit prorata based on their carrying amount.
44. Answer is (B).

Building 2,000,000 20/45 400,000
Inventory 1,500,000 15/45 300,000
Trademark 1,000,000 10/45 200,000
4,500,000 900,000
The remaining loss of P900,000 is allocated to the assets other than goodwill based on
carrying amount.
45. Answer is (B).

Trademark 3,000,000
PV of cash flows (105,000/6%) 1,750,000
Impairment loss on trademark 1,250,000
46. Answer is (C).

Carrying amount of net assets (4,000,000 -1,100,000) 2,900,000
PV of cash flows (200,000 x 11.45) 2,290,000
Impairment loss on CGU 610,000
Impairment loss on goodwill (500,000)
Impairment loss on other assets 110,000
47. Answer is (C).

Customer list-January 1, 2015 2,100,000
Amortization for 2015 (2,100,000/3) ( 700,000)
PV of cash flows (800,000 x .94 + 500,000 x .89) 1,197,000
Impairment loss on customer list 203,000

13 Impairment of Assets

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13 Impairment of Assets

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FINANCIAL ACCOUNTING

THEORY & PRACTICE

a. Significant decrease or decline in the market value of the asset.

a. Evidence of obsolescence or physical damage of an asset.

4. What is the "recoverable amount" of an impaired asset?

5. Explain the meaning of "fair value less cost of disposal".

Essay Questions Page 1

6. Explain the "fair value hierarchy".

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

8. Explain the meaning of "value in use".

Essay Questions Page 2

Estimates of future cash flows include:

10. What cash flows are excluded in determining value in use?

11. How is the impairment loss recognized?

12. Explain fully a "cash generating unit".

Essay Questions Page 3

13. Explain the recognition of an impairment loss of a cash generating unit.

14. How is the impairment of a cash generating unit determined?

15. What is the "carrying amount of a cash generating unit"?

Essay Questions Page 4

16. Explain corporate assets and their impairment.

As a consequence, if there is an indication that a corporate asset may be impaired, the

17. Explain the reversal of an impairment loss.

Impairment of intangible assets is recognized in accordance with PAS 36 on impairment of

Essay Questions Page 5

19. Explain the impairment of goodwill.

Essay Questions Page 6

Multiple Choice - Theory

3. What is impairment of asset?

MCQ - Theory Page 7

7. Which of the following statements is incorrect concerning corporate assets?

MCQ - Theory Page 8

MCQ - Theory Page 9

17. What is the recoverable amount of an asset?

18. What is fair value of an asset?

19. Fair value is defined as

20. What is the best evidence of fair value?

21. An active market is

22. Costs of disposal include all of the following, except

MCQ - Theory Page 10

23. Which of the following statements best describes "value in use"?

24. Value in use of an asset is equal to

MCQ - Theory Page 11

29. Which of the following is not relevant in determining value in use?

31. If the fair value less cost of disposal cannot, be determined

32. If the assets are to be disposed of

MCQ - Theory Page 12

35. How is the loss calculated for an impaired asset?

36. Impairment loss for productive asset shall be reported

MCQ - Theory Page 13

MCQ - Theory Page 14

Multiple Choice – Problems: Basic Problems

4. On January 1, 2014, Leah Company owned a machine having a carrying amount of

MCQ - Problems Page 15

MCQ – Problems Page 16

Expected undiscounted net future cash inflows related to the

9. Synthia Company, a clothing manufacturer, purchased a sewing machine for P2,000,000 on

MCQ - Problems Page 17

MCQ – Problems Page 18

MCQ - Problems Page 19

MCQ – Problems Page 20

MCQ - Problems Page 21

Gain on reversal of impairment