PROBLEM 1 (IMPAIRMENT LOSS)

The Midnight Sky Corp. is assessing one of its factories for impairment as of December 31, 2021 due to a
competitor launching a more superior product rivaling the product line being produced by the factory.
The factory produces one of the company’s product line and is considered a separate cash generating
unit from the rest of its other factories producing other product lines. The assets in the factory included
the Land (Cost: P1M); Building (Cost: P6M) and an Equipment (ABC) (Cost: P2M) which were acquired in
January of 2018 (when the product line has been launched). Another Equipment (DEF) (Cost: P3M) was
acquired in January of 2020 (when the product line was expanded). The building had a useful life of 20
years while the equipment were estimated to have a useful life of 10 years. Assets are being depreciated
under the straight-line method to zero residual value.

Individual cash flows related to each asset comprising the factory cannot be ascertained thus you
suggested that the company treat the factory as a single cash generating unit for the purpose of applying
PAS 36, Impairment of assets. A cash generating unit as defined by the said standards is the smallest
identifiable group of assets that generates cash inflows that are largely independent of the cash inflows
from other assets or group of assets.

As a result of the introduction of a more superior product by the competitor, the client ascertained that
the product being currently produced by the factory can now only generate cash flows for the company
for the next five years, after which the assets in the factory can be disposed for a total of lump-sum of
P1.4M. The following presents the estimates of the said cash flows (pre-tax):

Year Revenues Expense, excluding

Depreciation
2022 4,200,000 1,680,000
2023 3,800,000 1,910,000
2024 3,200,000 2,050,000
2025 2,400,000 1,610,000
2026 1,300,000 800,000
The fair value of
the group of assets net of estimated disposition costs was determined to be P6.5M. The prevailing pre-
tax discount rate appropriate for this analysis is 6% while post-tax discount rate is at 8%.

Requirements:

1. What is the value in use of the group of assets?

2. How much is the recoverable amount of the group of assets?
3. How much is the impairment loss?
4. Assuming that the land had a fair market value less cost to sell at 1.2M, what is the
carrying value of the building after impairment loss recognition?
PROBLEM 2 (REVALUATION MODEL)
Six Underground Company acquired a machine on January 1, 2018, at a cost of P1,500,000. It was
expected to have a useful economic life of 10 years. Spenser Confidential uses the straight-line method
in depreciating its machinery and equipment and reports on a calendar year basis.

On December 31, 2021, the machine was appraised as having a gross replacement cost of P2,700,000.
Six Underground Company applies the revaluation model in valuing this class of property, plant, and
equipment after its initial recognition.

Requirements:

1. How much is the depreciation expense in 2022?

2. How much is the balance of the revaluation surplus account on December 31, 2022, assuming
that the company uses the “Piecemeal basis” of transferring the revaluation surplus to retained
earnings?
3. What is the carrying value of the machine on December 31, 2022?
4. Assuming that the machinery was sold on December 31, 2023, at P1,400,000, what is the gain
or loss to be recognized in the profit or loss for 2023 and how much in revaluation surplus
should be transferred as a “lump-sum to retained earnings?
5. Assuming that the fair market value of the equipment is P2.45M December 31, 2021, what is
the carrying value of the revaluation surplus on December 31, 2022, under “Piecemeal basis” of
transferring the revaluation surplus to retained earnings