Accounting for Wasting Assets

Standard: IFRS 6 – Exploration for and evaluation of Mineral Resources

Theories:

1. Which of the following is considered as exploration and evaluation expenditures?

a. Cost of acquiring the legal rights to explore a specific area.

b. Cost of examining the technical feasibility and economical viability of extracting mineral
resources.

c. Exploratory drilling, trenching and sampling.

d. All of these are considered as exploration and evaluation expenditures.

2. Which of the following is not considered as exploration and evaluation expenditures?

a. Expenditures before an entity obtained rights to explore.

b. Expenditures after the technical feasibility and commercial viability of extracting mineral
resources are demonstrable.

c. Expenditures on commercial production.

d. All of these are not considered as exploration and evaluation expenditures.

3. Which of the following expenditures would never qualify as an exploration and evaluation
asset?

a. Expenditure for acquisition of rights to explore.

b. Expenditure for exploratory drilling.

c. Expenditures related to the development of mineral resources.

d. Expenditures for activities in relation to evaluating the technical feasibility and

commercial viability extracting a mineral resource.

e. All these expenditures would qualify as an exploration and evaluation asset.

4. Exploration and evaluation assets are initially measured at

a. Cost

b. Fair value

c. Fair value less estimated costs of disposal

d. Present value
5. Exploration and evaluation assets are subsequently measured using the

a. Cost model

b. Revaluation model

c. Fair value model

d. Either A or B.

6. Which of the following does not pertain to the characteristics of wasting assets?

a. Wasting assets are physically consumed.

b. Wasting assets are replaceable only through acts of nature.

c. Wasting assets can also be produced through the efforts of men.

d. Wasting assets are material objects with economic value produced by nature.

7. Cost of wasting asset is commonly divided into four categories that does not include:

a. Restoration cost

b. Exploration cost

c. Development cost

d. Importation cost

8. The following statements correctly describes exploration cost except:

a. Exploration cost covers two methods namely, successful effort method and full cost
method, wherein under the successful effort method, any cost of unsuccessful
discoveries is expensed in the period incurred while full cost method indicates that
whether successful or unsuccessful discoveries, such cost will be capitalized.

b. Exploration cost covers two methods namely, successful effort method and full cost
method, wherein under the successful effort method, whether successful or
unsuccessful discoveries, such cost will be capitalized while full cost method indicates
that any cost of unsuccessful discoveries is expensed in the period incurred

c. Exploration cost refers to expenditure incurred in an attempt to locate the natural

resource to be extracted.

d. Exploration cost refers to expenditure incurred before the technical feasibility and
commercial viability of extracting a mineral resource are demonstrated.

9. Which of the following statements is not true about depletion?

 a. Depletion is considered as cost of materials used in a production.

b. Depletion is treated as part of cost of sales in the period of extraction.

c. Depletion is computed by using the units of output method only.

d. All these statements are true about depletion.

10. Which of the following is not part of the amount subject to depletion?

a. Acquisition cost of the mineral resource deposit.

b. Exploration cost

c. Tangible development cost associated with equipment used to extract the mineral
resource.

d. Intangible development cost such as drilling, tunnel, and shaft.

e. All of these are part of the amount subject to depletion.

11. Which of the following depreciation methods approximates the method used to deplete the
cost of natural resources?

a. Straight-line method

b. Sum-of-years digits method

c. Double declining balance

d. Units of production method

12. When there is a revision of depletion rate

a. The revision is treater as a change in accounting estimates

b. The revision is treated as change in accounting policy.

c. The entity shall record any gain or loss from revision.

d. The entity shall directly adjust retained earnings as a result of the revision.

13. Property used in mining activities which has an alternative use is depreciated using the

a. Straight-line method

b. Output method

c. Straight-line method if the useful life of the property is shorter than the mining period.

d. Output method if the mining period is shorter than the useful life of the property.
 e. C and D

14. Property used in mining activities which has no alternative use is depreciated using the

a. Straight-line method

b. Output method

c. Straight-line method if the useful life of the property is shorter than the mining period.

d. Output method if the mining period is shorter than the useful life of the property.

e. C and D

15. Which of the following statements is correct about the manner of depreciating mining
properties in the period of shutdown of mining operation?

a. During shutdown of mining operation, output method of depreciation may be used.

b. During shutdown of mining operation, straight-line method of depreciation may be used.

c. During shutdown of mining operation, an entity has the sole discretion on which between
output method or straight-line method to apply in depreciating its mining properties.

d. During shutdown of mining operation, the computation of depreciation is not permitted.

Problems 1: Tangible and Intangible Exploration and Evaluation Asset

Penada Company, a mining company, has incurred the following costs during the year 2021:

Topographical, geological, geochemical, and geophysical study cost

200,000
Deferred costs associated with consumables, such as materials and fuels
used, contractor payments and employee remuneration 495,000
Depreciation on the capitalized tangible exploration and evaluation assets
225,000
Vehicles and drilling rights
1,900,000
Cost of replacing major parts of equipment used in exploration and evaluation
activities 260,000
Cost of major inspection of equipment used in exploration and
evaluation activities 80,000
Amount paid for the acquisition of rights to explore (drilling rights and
Exploration licenses) 110,000

1. What is the carrying amount of tangible exploration and evaluation assets should the
entity disclose at the end of 2021?
2. What amount should be recognized as intangible exploration and evaluation assets
during 2021?
Problem 2: Exploration Cost – Successful method and Full cost method

Perfecto Company spent P3,500,000 on exploration in 2021 for each of the 15 oil wells it drilled.
Ten of the fifteen wells drilled were dry holes. The successful effort method of accounting was
employed by the company. In 2021, the entity depleted 30% of the oil discovered.

1. How much exploration cost should be reported in the December 31, 2021 statement of
financial position?
2. Assume that the entity used instead the full cost method, how much exploration cost
should be reported in the December 31, 2021 statement of financial position?
Problem 3: Depletion

At the start of the current year. Jude Company paid P41,000,000 for a mineral containing
2,160,000 tons of detachable ore, according to a geological survey. After the ore is extracted,
the property is projected to be worth P3,600,000.

The firm spent P14,800,000 on development costs to get the land ready for ore extraction.
270,000 tons were removed and 240,000 tons were sold in the current year.

1. How much is the depletion for the current year?

2. How much is the depletion to be included in the cost of goods sold?
3. How much is the depletion to be included in the ending inventory?

Problem 4: Depletion

On January 1, 2021, the Reddick Company purchased a mining right for P30,000,000. The mine’s
recoverable ore reserves are estimated to be 4,000,000 tons.

Following the extraction of all ore, the company will be obligated by law to return the land to its
original state. The present value of restoration cost is P2,000,000. The company estimated that
the property may be sold for P5,000,000. At a cost of P6,000,000, roads were built, and other
development costs were invested to aid the extraction and transportation of the mined ore in
early 2021. 200,000 tons of ore were extracted and sold in 2021.

A new study conducted by a new mining engineer on December 31, 2022, revealed that
5,000,000 tons of ore were available for mining. 225,000 tons of ore were mined and sold in
2022.

1. How much depletion expense should be recognized in 2022?

Problem 5: Depletion

Carlisle Corp. paid P6,000,000 for the land. Over the following 20 years, the firm expects to
extract 1 million tons of mine from this area, at which point the residual value will be zero. Each
year, 30,000 tons were extracted and sold for P80 per ton during the mine’s first two years of
operation.

At the start of the third year, the mine’s total remaining lifespan capacity was boosted to
P1,200,000 tons, and the year’s residual value was predicted to be P480,000. 55,000 tons were
mined in the third year and sold for P85 per tons.

1. How much would be the depletion for the 3rd year?

Problem 6: Depletion and treatment for the value of land

Donnie Company paid P35,000,000 for a coal mine at the start of this year. The amount of coal
that can be removed is expected to be 1,500,000 tons.

The entity is responsible for restoring the land at a total cost of P5,000,000 (present value,
P3,600,000). After the restoration, the land is expected to be worth P3,150,000. The company
spent P7,500,000 on development costs to get the mine ready for production. This year, 450,000
tons of coal were extracted, and 300,000 tons were sold.

What total amount of depletion should be recorded for the current year?

Problem 7: Revision of Depletion Rate

On January 1, 2021, Dhong Mining Corp. purchased an ore mine at P30,000,000. The cost of
exploration was P6,000,000, while additional development costs were P4,000,000. The resource
deposit is estimated to be around 2,000,000 units.

A total of 150,000 units were extracted in 2021. 250,000 units were extracted the subsequent
year.

Additional development expenditures for the mine were P2,000,000 at the beginning of 2023.
The entity also calculated that there are still 2,500,000 units in the resource deposit.

In 2023, 300,000 units were extracted.

1. How much is the computed depletion rate in 2021?

2. How much is the depletion in 2022?
3. How much is the depletion rate to be applied in 2023?
4. How much is the depletion in 2023?

Problem 8: Depletion

During 2019, Bee Gees Corp. purchased a mining property. Company records reveal the
following:

2019
Purchase price of the mining property P6,675,000
Estimated supply of mineral resources 3,500,000 tons
Estimated value of the property after removal of mineral resourcesP975,000
Total resources removed during the year None
2020
Capitalized development costs P1,125,000
Total resources removed during the year 250,000 tons
2021
Capitalized development costs None
 Total resources removed during the year 550,000 tons
2022
Estimated total resources to be recovered in future years
based on new discoveries 3,660,000 tons
Capitalized development costs P1,441,500
Total resources removed this year 700,000 tons

1. What is the depletion rate for 2019?

2. What is the depletion rate for 2020?
3. How much is the depletion for 2020?
4. How much is the depletion for 2021?
5. What is the depletion rate for 2022?
6. How much is the depletion for 2022?

Problem 9: Wasting Asset Valuation

On January 2, 2021, Nick Corp. was formed. It was given permission to issue 100,000 common
shares. It sold 20,000 shares at P100 each on the day it was formed., and the remaining shares
were exchanged for specific land0bearing recoverable ore reserves assessed by geologists to
be worth 1,000,000 tons. The property is estimated to be worth P15,000,000 and has no residual
value.

The entire cost of mining buildings and equipment in 2021 was P1,500,000. 150,000 tons of ore
were mined during the year, with 60,000 tons remaining unsold on December 31. The remaining
tonnage was sold for cash at P50 per ton. The following were the expenses incurred and paid
for throughout the year, excluding depletion and depreciation:

Mining Costs P450,000

Distribution costs 125,000
General and Admin 222,500
It is believed that buildings and equipment will be used only over the life of the mine.

1. How much is the total cost per ton?

2. How much is the cost of goods sold for 2021?
3. The Ore ending inventory amounted to?

Problem 10: Depletion and Depreciation of Mining Property

Annoma Mining Inc. paid P15,000,000 for natural resource property in 2021. The property was
located near a large metropolis and has a P1,500,000 anticipated residual value. Annona, on the
other hand, should rehabilitate the land once natural resources have been depleted. The asset
retirement obligation had a present value of P880,000. Annona’s typical borrowing rate is 8%.

The following information pertains to the property’s use:

a. Annona spent P800,000 in development costs and P600,000 on property buildings in
2021. After the natural resources are exhausted, Annona does not believe the buildings
will be useful.
b. Additional mining development costs were P600,000 and P1,600,000 in 2022 and 2023,
respectively.
 c. For the years 2021 and 2025, the tonnage mined and projected remaining tons are as
follows:

Year Tons Extracted Estimated Tons Remaining

2021 None 5,000,000
2022 1,500,000 3,500,000
2023 1,800,000 2,000,000
2024 1,700,000 900,000
2025 900,000 -

1. How much is the depletion expense and depreciation expense for 2022?
2. How much is the depletion expense and depreciation expense for 2023?
3. How much is the depletion expense and depreciation expense for 2024?
4. How much is the depletion expense and depreciation expense for 2025?

Problem 11: Depletion and Depreciation

On July 1, 2022, Ice Nuclear Company, a calendar year company, purchased the rights to a mine.
The total purchase price was P32,800,000, of which P4,000,000 was allocable to land.

Estimated reserves were 1,800,000 tons. The company expected to extract and sell 25,000 tons
per month.

The entity purchased new equipment on July 1, 2022 for P15,000,000. The equipment had a
useful life of 8 years and has a residual value of P600,000.

Case 1: the equipment can be used in another mining site.

1. What amount should be recorded as depletion for 2022?
2. What amount should be recorded as depreciation of the mining equipment for 2022?

Case 2: the equipment would be no use after all the resources are removed in the mining site.
1. What amount should be recorded as depletion for 2022?
2. What amount should be recorded as depreciation of the mining equipment for 2022?
3. Assuming the equipment has a useful life of 5 years, what amount should be recorded
as depreciation for 2023?

Problem 12: Shutdown of Mining Operation

In 2018, Mineral Mining Co. purchased real estate containing copper for a total cost of
P5,000,000. Immovable tangible equipment costs for drilling rig foundation totaled P2,500,000.
Estimated recoverable reserves from the mine are 1,000,000 units. It is estimated that 100,000
units will be extracted each year. The drilling rig foundation has an estimated useful life of 15
years.

Actual units extracted from 2018 through 2020 totaled 340,000 units. No units were extracted
during 2021 due to an employee strike. Extraction resumed in 2022 and total units extracted
that year was 80,000 units.

Compute for the following:

1. Depletion for 2021.
 2. Depreciation for 2021
3. Depletion for 2022
4. Depreciation for 2022

Problem 13: Liquidating Dividends

Sette Company provided the following balances at the end of 2022:

Wasting asset, at cost P76,800,000
Accumulated depletion 20,000,000
Capital liquidated 15,000,000
Retained earnings (20% restricted) 12,500,000
Depletion based on 225,000 units extracted at P20 per unit 4,500,000
Inventory of resource deposit (50,000 units) 2,400,000

What is the maximum dividend that can be declared at the end of 2022?

Accounting for Impairment of Long-Term Assets

Standard: IAS 36 – Impairment of Assets

Theories:

1. Impairment occurs when

a. The carrying amount of an asset exceeds its recoverable amount
b. The recoverable amount of an asset exceeds its carrying amount
c. The carrying amount of an asset exceeds its fair value
d. The fair value of an asset exceeds its carrying amount

2. Impairment loss is best describes as

a. The amount by which the carrying amount of an asset exceeds its recoverable amount
b. The amount by which the carrying amount of an asset exceeds its fair value
c. The amount by which the recoverable amount of an asset exceeds its carrying amount’
d. The asset depreciates quickly.

3. An asset is said to be impaired when the asset’s

a. Carrying amount exceeds its recoverable amount
b. Recoverable amount exceeds its carrying amount
c. Carrying amount exceeds its fair value
d. Fair value exceeds its carrying amount

4. Which of the following statements is incorrect concerning the impairment of an asset?

a. The asset is impaired when its carrying amount exceeds its recoverable amount
b. When the carrying amount of an asset exceeds its recoverable amount, there is a need
to write down the asset’s carrying amount to its recoverable amount
c. The asset is impaired when its recoverable amount exceeds its carrying amount
d. Choices a and b.

5. Which of the following best describes the recoverable amount of asset?

a. Value in use
 b. Fair value less cost of disposal
c. Value in use or fair value less cost of disposal, whichever is higher.
d. Value in use or fair value less cost of disposal, whichever is lower.

6. Which of the following best describes value in use?

a. The amount which an entity expects to obtain for an asset at the end of the useful life.
b. The undiscounted future cash flows expected to be derived from an asset.
c. The present value of the future cash flows expected to be derived from an asset
d. The price that would be received to sell an asset in an orderly transaction between
market participants at the measurement date.

7. The estimates of future cash flows in calculating the value in use include all the following,
except
a. Future cash inflows from the continuing use of the asset
b. Future cash outflows to be incurred to generate the cash inflows from the continuing
use of the asset.
c. Net cash flow received on the disposal of the asset at the end of its useful life
d. Future payments of income taxes

8. Cost of disposal excludes which of the following?

a. Asset removal cost
b. Legal cost
c. Interest cost
d. All of these are included as cost of disposal

9. An impairment that relates to an asset that is carried at revalued amount shall

a. Be recognized in profit or loss
b. Be recognized in other comprehensive income
c. Be charged to the revaluation surplus account that relates to the asset.
d. First be charged to the revaluation surplus account that relates to the asset and any
amount in excess of the related revaluation surplus shall be recognized in profit or loss.

10. Which of the following incorrectly describes the accounting for reversal of impairment?
a. An impairment loss recognized for an asset in prior years shall be reversed if its
recoverable amount is higher that its current carrying amount, however, the increased
carrying amount of the asset shall not exceed the carrying amount that would have been
determined had no impairment loss been recognized for the asset in prior years.
b. If the asset is carried at revalued amount, any reversal of impairment shall be recognized
in profit or loss only to the extent it reverses an unrecovered revaluation decrease and
any excess is credited to revaluation surplus.
c. Reversal of impairment is usually recognized by debiting the related accumulated
depreciation of the asset.
d. Reversal of impairment is never recognized in accounting.

Problem 1: Impairment of Asset: Core Principle

Refer to the following three independent situations:

Situation 1
Carlisle Company tested one of its machinery for possible impairment. On December 31, 2022,
the following information is gathered:

Machinery P500,000
Accumulated depreciation 150,000
Fair value 325,000
Costs of disposal 25,000
Value in use 290,000

1. What is the machinery’s recoverable amount on December 31, 2022?

2. How much is the impairment loss to be reported in 2022?

Situation 2

Carlisle Company tested one of its machinery for possible impairment. On December 31, 2022,
the following information is gathered:

Machinery P500,000
Accumulated depreciation 150,000
Fair value 300,000
Costs of disposal 25,000
Value in use 290,000

1. What is the machinery’s recoverable amount on December 31, 2022?

2. How much is the impairment loss to be reported in 2022?

Situation 3

Carlisle Company tested one of its machinery for possible impairment. On December 31, 2022,
the following information is gathered:

Machinery P500,000
Accumulated depreciation 200,000
Fair value 350,000
Costs of disposal 35,000
Value in use 320,000

1. What is the machinery’s recoverable amount on December 31, 2022?

2. How much is the impairment loss to be reported in 2022?

Problem 2: Determination of fair value less cost of disposal

Jasper Company tested its equipment with historical cost of P1,000,000 and accumulated
depreciation of P250,000 for possible impairment. In estimating the recoverable amount, the
company determined that the fair value of the equipment is P600,000. The following costs were
also estimated:

Legal costs, stamp tax, and other similar fees P5,000

Commission to broker 1,000
Termination benefits associated with reorganizing a company
following the disposal of the equipment 2,500

Jasper Company believes that the difference between the equipment’s value in use and its fair
value less cost of disposal is immaterial.

1. What is the recoverable value of the equipment

2. How much is the impairment loss to be recognized?

Problem 3: expected future cash flows as a component of value in use

Ball company determined as result of a plant rearrangement that there had been a significant
change in the manner in which a machinery was going to be used in manufacturing process.

Estimated cash inflows from the use of the machinery P1,750,000

Estimated cash outflows from the use of the machinery 375,000
Estimated residual value of the machinery at the end
Of its useful life 250,000
Estimated income tax payments 100,000

What total amount should be included as future cash flows in determining the machinery’s value
in use

Problem 4: Computation in value in use

Refer to the following two independent situations:

Situation 1
Alice Company tested its machinery with a carrying amount of P1,500,000 for possible
impairment on December 31, 2022. The company determined that the machinery’s fair value
less costs of disposal on the same date is P1,000,000.

In estimating the value in use, the company projected the following cash flows for the next five
years:

Year Future cash inflows Future cash outflows

2023 P500,000 P100,000
2024 450,000 80,000
2025 400,000 60,000
2026 350,000 40,000
2027 300,000 20,000

The appropriate discount rate is 12%. Round off PV Factors to four decimal places.

1. What is the recoverable amount of the machinery on December 31, 2022?

2. How much impairment loss shall be reported for 2022?

Situation 2
Alice Company tested its machinery with a carrying amount of P1,500,000 for possible
impairment on December 31, 2022. The company determined that the machinery’s fair value
less costs of disposal on the same date is P1,000,000.
In estimating the value in use, the company projected the following cash flows for the next five
years:

Year Future cash inflows Future cash outflows

2023 P500,000 P100,000
2024 450,000 80,000
2025 400,000 60,000
2026 350,000 40,000
2027 300,000 20,000

Additional information:
 Each year’s projected future cash outflows include the following:
Future cash flows relating to restructuring to which the entity is
not yet committed P2,000
Future costs of enhancing or improving the asset’s performance 1,000
Future income tax payments 500

 Excluded from the projected future cash outflows are the estimated day-to-day costs of
servicing the machinery amounting to P5,000 per year.

The appropriate discount rate is 12%. Round off PV Factors to four decimal places.

1. What is the recoverable amount of the machinery on December 31, 2022?

2. much impairment loss shall be reported for 2022?

Problem 5: Accounting for impairment and subsequent depreciation

On January 1, 2020, Chambers Company purchased an equipment for P2,500,000. The

equipment was estimated to have a useful life of 8 years from the date of acquisition and a
residual value of P250,000. It is the company’s policy to depreciate all of its PPE using the
straight-line method.

On December 31, 2022, the company tested the equipment for possible impairment. The
company determined the following information on December 31, 2022:
Undiscounted net cash inflows P300,000 per year
Fair value of the equipment 1,400,000
Estimated cost of disposal 100,000
Discount rate 8%

There have been no changes in the initial estimates of the useful life and residual value. Round
off PV factors to four decimal places.

1. What is the carrying value of the equipment on December 31, 2022 prior to impairment
testing?
2. What is the recoverable amount of the equipment on December 31, 2022?
3. How much is the impairment loss to be reported for 2022?
4. What is the depreciation expense of the equipment for 2023?

Problem 6: Accounting for impairment and subsequent depreciation

On January 1, 2020, Chan Company purchased an equipment for P2,500,000. The equipment
was estimated to have a useful life of 10 years from the date of acquisition and a residual value
of P250,000. It is the company’s policy to depreciate all of its PPE using the straight-line method.

On December 31, 2021, the company tested the equipment for possible impairment. The
company determined the following information on December 31, 2021:
Undiscounted net cash inflows P300,000 per year
Fair value of the equipment 1,700,000
Estimated cost of disposal 100,000
Discount rate 10%

There have been no changes in the initial estimates of the useful life and residual value.

On December 31, 2024, after recording depreciation for the year, the company tested again the
equipment for possible impairment. The company determined the following information on
December 31, 2024:
Undiscounted net cash inflows P200,000
Fair value of the equipment 850,000
Estimated cost of disposal 50,000
Discount rate 9%

The company revised its estimate of the equipment’s residual value to P300,000 and the
remaining useful life of the equipment is 3 years beginning January 1, 2025.

1. What is the carrying value of the equipment on December 31, 2021 prior to impairment
testing?
2. What is the recoverable amount of the equipment on December 31, 2021?
3. How much is the impairment loss to be reported for 2021?
4. What is the depreciation expense of the equipment for 2022?
5. What is the carrying value of the equipment on December 31, 2024 prior to the second
impairment testing?
6. What is the recoverable amount of the equipment on December 31, 2025?
7. How much is the impairment loss to be reported for 2024?
8. What is the depreciation expense of the equipment for 2025?

Problem 7: Impairment on a revalued asset

Refer to the following two independent situations:

Situation 1
Rosalie Co. tested one of its building for possible impairment on December 31, 2022. It is the
company’s policy to subsequently measure its building using the revaluation model. The
following information was gathered on December 31, 2022:
Carrying amount P4,000,000
Revaluation surplus 400,000
Fair value less costs of disposal 3,650,000
Value in use 3,700,000

1. What amount of impairment shall be reported in profit or loss for 2022?

2. What is the remaining of the revaluation surplus on December 31, 2022?
Situation 2
Rosalie Co. tested one of its building for possible impairment on December 31, 2022. It is the
company’s policy to subsequently measure its building using the revaluation model. The
following information was gathered on December 31, 2022:
Carrying amount P4,000,000
Revaluation surplus 400,000
Fair value less costs of disposal 3,400,000
Value in use 3,500,000

1. What amount of impairment shall be reported in profit or loss for 2022?

2. What is the remaining of the revaluation surplus on December 31, 2022?

Problem 8: Impairment on a Revalued Asset

On January 2, 2020, Emmet Co. acquired a building for a total cost pf P5,000,000. It was
estimated that the building has a useful life of 20 years with residual value of P500,000. The
company uses the revaluation model to account for the building. The building will be
depreciated on a straight-line basis. On December 31, 2021, it was determined that the building
has a fair value of P4,800,000.

On December 31, 2022, the company tested the building for possible impairment. It was
determined that the recoverable value of the building as of this date amounts to P4,400,000.

On December 32, 2025, the company again tested the building for possible impairment. It was
determined that the recoverable value of the building as of this date amounts to P3,500,000.

1. What amount of revaluation surplus shall be recognized on December 31, 2021?

2. What is the depreciation expense for 2022?
3. What is the carrying value of the building on December 31, 2022 prior to impairment
testing?
4. What amount of impairment loss shall be recognized in profit or loss on December 31,
2022?
5. What is the balance of the revaluation surplus account on December 31, 2023?
6. What is the depreciation expense for 2024?
7. What is the carrying value of the building on December 31, 2025 prior to impairment
testing?
8. What amount of impairment loss shall be recognized in profit or loss on December 31,
2025?
9. What is the depreciation expense for 2025?

Problem 9: Reversal of impairment

On January 1, 2021, Savitar Company acquired a machinery at a cost of P2,500,000. It was

estimated to have a useful life of 10 years and no residual value. The company uses the cost
model to account for the machinery and the straight-line method is used in depreciating the
machinery.

On December 31, 2022, the company tested the machinery for possible impairment and
determined that the recoverable value of the said machinery amounted to P5,000,000.
On December 31, 2023, it was revealed that the recoverable value of the machinery had
increased to P1,875,000.

1. How much is the impairment loss reported in 2022?

2. What is the carrying amount of the machinery on December 31, 2023 before reversal of
impairment?
3. What is the carrying amount of the machinery on December 31, 2023 on the basis that it
was not impaired?
4. What amount of gain on reversal of impairment should be reported in profit or loss for
2023?
5. Assume the same information, except that the recoverable value of the machinery has
increased to P1,500,000 on December 31, 2023. What amount of gain on reversal of
impairment should be reported in profit or loss for 2023?

Problem 10: Reversal of Impairment – Revaluation model

On January 1, 2021, Westlife Company acquired a machinery at a cost of P2,500,000. It was

estimated to have a useful life of 10 years and no residual value. The company uses the
revaluation model to account for the machinery and the straight-line method is used in
depreciating the machinery.

On December 31, 2022, the company tested the machinery for possible impairment and
determined that the recoverable value of the said machinery amounted to P1,500,000.

On December 31, 2023, it was revealed that the recoverable value of the machinery had
increased to P1,875,000

1. How much is the impairment loss to be reported in 2022?

2. What is the carrying amount of the machinery on December 31, 2023?
3. What is the carrying amount of the machinery on December 31, 2023 on the basis that it
was not impaired?
4. What amount of gain on reversal of impairment should be reported in profit or loss for
2023?
5. What amount should be credited to revaluation surplus on December 31, 2023?

Problem 11: Impairment of Non-depreciable asset

Westlife Company purchased a tract of land worth P2,500,000 on January 1, 2021.

On December 31, 2021, an independent appraiser determined that the value of the land is at
P3,000,000.

On December 31, 2022, the company determined that the fair value of the land amounted to
P2,200,000.

On December 31, 2023, it was revealed that the recoverable value of the land had increased to
P4,000,000.

1. How much is the impairment loss reported as a component of profit or loss in 2022?
2. What amount of gain on reversal of impairment shall be recognized in profit or loss in
 2023?
3. What amount shall be credited to revaluation surplus on December 31, 2023?