2 - E. Problems - Impairment of Assets

PROBLEMS -
IMPAIRMENT OF
ASSETS
ACFAR 2132 INTERMEDIATE ACCOUNTING
LEOPOLDO D. MEDINA, CPA, MSA
LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132
Problem 1

Caracas Company determined that due to obsolescence an equipment
with an original cost of P4,500,000 and accumulated depreciation on
January 1, 2020 of P2,100,000 had suffered a permanent impairment
loss, and as a result, should have a recoverable amount of only
P1,500,000 as of the beginning of the year.
In addition, the remaining useful life of the equipment was reduced

from 8 to 3 years.
a. Prepare journal entry to record the
impairment on January 1, 2020.

Cost 4,500,000
-AD 2,100,000
CA 2,400,000 > Recoverable Amount RA 1,500,000
Impairment loss 900,000

Accumulated depreciation 900,000
b. Prepare journal entry to record the
depreciation for 2020.

Depreciation 500,000
RA becomes the new CA 1,500,000

Divided by 3 yrs remaining life
c. Determine the carrying amount of the
equipment on December 31, 2020.

Cost 4,500,000
Accumulated depn
2,100,000
900,000
500,000 3,500,000
CA 12/31/20 1,000,000
Problem 2

In January 2018, Bogota Company purchased equipment at a cost of
P2,500,000. The equipment has a residual value of P500,000, a useful
life of 8 years and is depreciated by the straight line method. Two years
later, it became apparent that this equipment suffered permanent
impairment in value.
In January 2020, management determined the recoverable amount of

the equipment to be only P875,000 with a 2-year remaining useful life
and residual value of P125,000.
a. Prepare journal entry to record the
impairment loss on January 1, 2020

Cost 2,500,000
-AD
2.5M-500T
8 x 2 500,000
CA 2,000,000 > RA 875,000
IL 1,125,000
Impairment loss 1,125,000

Accumulated depreciation 1,125,000
depreciation for 2020.

875,000-125,000 RV
2 = 375,000
c. Determine the carrying amount of the
equipment on December 31, 2020.

Cost 2,500,000
-AD
500,000
1,125,000
375,000 2,000,000
CA 12/31/20 500,000
Problem 3

On January 1, 2020, Santiago Company owned a group of machines with the
following aggregate cost and accumulated depreciation:
Machinery 90,000,000
The machines have an average remaining useful life of 4 years and it has been
determined that this group of machines constitutes a cash generating unit. The
FVLCOD of this group of machines in an active market is determined to be
P48,000,000.
Based on supportable and reasonable assumption, the financial forecast for this group

of machines reveals the following cash inflows and cash outflows for the next four
years.
Cash inflows Cash outflows
2020 30,000,000 12,000,000
2021 32,500,000 17,500,000
2022 27,500,000 12,500,000
2023 16,000,000 4,000,000
It is believed that a discount rate of 8% is reflective of time value of money.

a. Determine the value in use.

Net inflow x PV factor Present value
2020 18,000,000 0.926 16,668,000
2021 15,000,000 0.857 12,855,000
2022 15,000,000 0.794 11,910,000
2023 12,000,000 0.735 8,820,000
Value in use 50,253,000
b. Determine the recoverable amount.

Fair Value vs Value In Use
Less Cost Of Disposal
FVLCOD VIU
48,000,000 < 50,253,000
whichever is HIGHER
50,253,000
Recoverable Amount RA
c. Prepare journal entry to record the
impairment loss, if any.

Cost 90 M
-AD 25 M
CA 65 M > RA 50.253 M
Impairment Loss IL
14,747,000

d. Prepare journal entry to record the
depreciation for the current year.

50.253 M – 0 RV
4 = 12,563,250
Depreciation 12,563,250
Problem 4

Quito Company reported an impairment loss of P2,000,000 in the income
statement for the year ended December 31, 2020. This loss was related to
long -lived asset acquired on January 1, 2019 with cost of P10,000,000,
useful life of 10 years and no residual value.
On December 31, 2020, the entity reported the long -lived asset at
P6,000,000 which is the fair value less cost of disposal on such date.
On December 31, 2021, the entity determined that the fair value less
cost of disposal of the impaired long-lived asset had increased to
P7,500,000. The straight line depreciation is recorded for the impaired
asset.
Prepare all indicated journal entries for
2020 and 2021.

Cost 10 M
-AD
10M – 0
10 x 2 2M
CA 12/31/20 8M > RA 6 M (given)  the new CA
IL 2 M (given)
2020
Depreciation 1,000,000
10M – 0 / 10 = 1M
CA 12/31/2020 6,000,000
-Depn 2021
6M - 0 7,000,000
8 750,000
CA 12/31/2021 5,250,000 < RA 7,500,000 *  based on FVLCOD
no impairment loss ;
Gain on reversal of 1,750,000
impairment 2,250,000 ?
*subject to limitation
LIMITATION : the new CA should NOT exceed
the CA assuming NO impairment loss is recognized
Cost 10,000,000
-AD
10M – 0
10 x 3 3,000,000 (3 yrs : 2019 to 2021)
CA 12/31/2021 7,000,000
2021
6M – 0 / 8

Gain on reversal of impairment 1,750,000
Cost 10,000,000
-AD
as of 12/31/20 2,000,000
Impairment 2,000,000
Depn 2021 750,000
Reversal of
impairment (1,750,000) 3,000,000
New CA 12/31/21 7,000,000
Problem 5

Lima Company purchased four convenience store buildings on January
1, 2014 for a total cost 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, 2020, the entity has converted the
building into a hotel and restaurant.
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 building will total P1,500,000
per year, and that the fair value less cost of disposal of the
four buildings totals P10,000,000. The appropriate discount
rate is 12%.
a. Determine the value in use

VIU = 1,500,000 x 5.65
= 8,475,000
b. Determine the impairment loss

Cost 25 M
-AD
25M – 2.5M
20 x 6 6.75 M FVLCOD vs VIU
CA 1/1/20 18.25 M > RA 10 M 10 M 8.475M
Impairment loss
IL 8,250,000
c. Determine the depreciation for the
current year.

Depreciation = 10 M – 0
10
= 1,000,000
Problem 6

At the beginning of current year, Sucre Company has an operating
division whose major industry is the manufacture of toy train. The toy
train division is regarded as a cash generating unit. There is a declining
interest in toy train because of the aggressive marketing of computer-
based toys.
The management measured the value in use of the toy train division at
the current year-end at P3,600,000. 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
Total CA 5,000,000
a. Determine the amount of impairment
loss.

CA 5M > RA 3.6 M based on VIU
IL
1,400,000
less: allocated
to Goodwill ( 500,000)  entire amount is impaired
900,000  allocated to noncash assets
based on relative CA
b. Allocate the impairment loss to the assets of
the cash generating unit.

Building 2,000,000 2/4.5 400,000
Inventory 1,500,000 1.5/4.5 300,000
Trademark 1,000,000 1/4.5 200,000
4,500,000 900,000
impairment loss.

Goodwill 500,000
Inventory 300,000
Trademark 200,000
After recording the impairment, the assets of the CGU have the
following CA :
Building, net 1,600,000
Inventory 1,200,000
Trademark 800,000
Total 3,600,000
Problem 7

La Paz Company has determined that the furniture division is a cash generating
unit. The entity calculated the value in use of the division to be P11,000,000.
The entity has also determined that the fair value less cost of disposal of the
building is P6,500,000. The carrying amounts of the assets are:
Building 8,000,000
Equipment 4,000,000
Inventory 4,000,000
16,000,000
a. Determine the impairment loss.

CA 16 M > RA 11 M  based on VIU given
IL
5,000,000
b. Allocate the impairment loss to the assets
of the cash generating unit.

CA Initial Re Allocated
allocation allocation IL
Building * 8M 8/16 2.5 M (1 M) 1.5 M
Equipment 4M 4/16 1.25 M 500 T 1.75 M
Inventory 4M 4/16 1.25 M 500 T 1.75 M
16 M 5M 0 5M
*8 M – 2.5 = 5.5 M
The CA of building should not fall below its RA 6.5 M;
5.5 M – 6.5 M = 1 M reduction in allocated impairment loss
1M is further allocated to Equipment and Inventory based on their

relative CA.
impairment loss.

Accumulated depreciation – Building 1,500,000
Accumulated depreciation – Equipment 1,750,000
Inventory 1,750,000
After recording the impairment, the assets of the CGU have the
following CA :
Building 6,500,000  based on the FVLCOD
Equipment 2,250,000
Inventory 2,250,000
11,000,000
Problem 8

Brasilia Company has four cash generating units. One CGU has been experiencing significant
losses in prior years. Thus, it becomes necessary to determine impairment for the cash
generating unit. The assets of the CGU at carrying amounts at the current year-ended are:
Cash 10,000,000
Accounts receivable 20,000,000
Inventory 30,000,000
Property, plant and equipment, net 50,000,000
Goodwill 5,000,000
115,000,000
It is reliably determined that the value in use of the cash generating unit at the current year-end
is P100,000,000.
a. Determine the impairment loss of the
cash generating unit.

CA 115 M > RA 100 M (based on VIU)
IL 15 M
Less : allocated
to Goodwill ( 5 M )  entire amount is impaired
10 M  allocated to non-cash assets
based on relative CA
impairment loss.

AR 20,000,000 20/100 2,000,000
Inventory 30,000,000 30/100 3,000,000
PPE net 50,000,000 50/100 5,000,000
100,000,000 10,000,000
Goodwill 5,000,000
Inventory 3,000,000
After recording the impairment, the assets of the CGU have the following
CA :
Cash 10,000,000
Inventory 27,000,000
PPE net 45,000,000
100,000,000
Problem 9

Buenos Aires Company has a number a cash generating units, including one whose
major operations is the manufacture of fine china.
The assets of the fine china division at carrying amount at the current year-ended are:
Machinery 5,000,000
Patent 1,000,000
Goodwill 1,000,000
10,000,000
The management tested the assets of the cash generating unit
for impairment. It is reliably determined that the value in use
of the cash generating unit is P7,200,000.
a. Determine the impairment loss of the
fine china division.

CA 10 M > RA 7.2 M (based on VIU)
IL 2.8 M
less: allocated
to Goodwill ( 1.0 M )  entire amount is impaired
1.8 M  allocated to noncash assets based
on relative CA
impairment loss.

Machinery 5,000,000 5/9 1,000,000
AR 3,000,000 3/9 600,000
Patent 1,000,000 1/9 200,000
9,000,000 1,800,000
Goodwill 1,000,000
Accumulated depreciation-Machinery 1,000,000
Accounts receivable 600,000
Patent 200,000
After recording the impairment, the assets of the CGU have the following CA :
Machinery net 4,000,000
Patent 800,000
7,200,000
Problem 10

One of the cash generating units of Georgetown Company is the
production of liquor. At year-end, the entity believed that the asset of the
cash generating unit are impaired based on an analysis of economic
indicators.
The assets and liabilities of the cash generating unit at carrying amount
at year-end are:
Cash 4,000,000
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 units is P30,000,000.
The accounts receivable are considered collectible, except
those considered doubtful.
a. Determine the carrying amount of the
cash generating unit.

Cash 4,000,000
AR net 6M – 1 M 5,000,000
Inventory 7,000,000
PPE net 22M – 4 M 18,000,000
Goodwill 3,000,000
Total assets 37,000,000
b. Determine the impairment loss, if any,
of the cash generating unit.

CA 37 M > RA 30 M based on VIU
IL 7 M
Less : allocated
to Goodwill ( 3 M )  entire amount is impaired
4M  allocated to assets except
Cash and AR net*
*All AR are collectible except those
considered doubtful.
impairment loss.

Inventory 7,000,000 7/25 1,120,000
PPE net 18,000,000 18/25 2,880,000
25,000,000 4,000,000
Goodwill 3,000,000
Inventory 1,120,000
After recording the impairment, the assets of the CGU have the following CA :
Cash 4,000,000
AR net 5,000,000
Inventory 5,880,000
PPE net 15,120,000
30,000,000
Problem 11

At year-end, Asuncion Company has a cash generating unit with the
following assets at carrying amount:
Inventory 200,000
Accounts receivable 300,000
Plant and equipment 6,000,000
Accumulated depreciation (2,600,000)
Patent 850,000
Goodwill 100,000
4,850,000
The accounts receivable are recorded as collectible and the
inventory has a fair value less cost of disposal which is equal to
the carrying amount. The patent has a fair value less cost of
disposal of P750,000.
At year-end, the entity determined the value in use of the unit at

P4,050,000.
Prepare journal entry to record the
impairment loss.

CA 4.85 M > RA 4.05 M
IL 800,000
Allocated to
Goodwill (100,000)  entire amount is impaired
700,000  allocated to noncash assets
EXCEPT Inventory and AR, which, in
the problem, are NOT impaired.
CA Initial Re Allocated
allocation Allocation IL
Plant & equipment net 3.4 M 80 % 560 T 40 T 600 T
Patent* 850 T 20 % 140 T (40 T) 100 T
4.25 M 700 T 0 700 T
*850 T – 140 T = 710 T
The CA of Patent should not fall below its RA 750 T;
710 T – 750 T = 40 T reduction in allocated impairment loss
The entire 40 T is further allocated to Plant & equipment net.

Goodwill 100,000
Patent 100,000
Problem 12

Montevideo Company has various cash generating units. One cash generating unit has
the following carrying amounts of assets at year-end:
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
13,000,000
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 was
greater than the carrying amount.
Prepare journal entry to recognize the
impairment.

CA 13 M > RA 8.5 M
IL 4.5 M
Allocated to
Goodwill (1.0 M)  entire amount is impaired
3.5 M  allocated to noncash assets EXCEPT
Inventory, which in the problem, is NOT
impaired.
Land 2,500,000 25 % 875,000
Plant and 7,500,000 75 % 2,625,000
equipment net
10,000,000 3,500,000
Goodwill 1,000,000
Land 875,000
Problem 13

On January 1,2017, Tegucigalpa Company purchased a machine for
P800,000 and established an annual depreciation charge of P100,000 over
eight-year life. During 2020, after issuing the 2019 financial statements, the
entity concluded that the machine suffered permanent impairment of the
operational value.
The reasonable estimate of the amount expected to be recovered through

use of the machine for the period January 1, 2020 through December 31,
2024 is P200,000.
What should be reported as carrying amount of the
machine on December 31, 2020?

Cost 800,000
-AD
800T – 0
8 x 3 300,000
CA 1/1/20 500,000 > RA 200,000
IL 300,000
APPROACH 1 APPROACH 2
New CA 1/1/20 200,000 Cost 800,000
Less : 2020 Depn AD
200T – 0 1/1/20 300,000
5 40,000 Impairment 300,000
CA 12/31/20 160,000 Depn 2020 40,000 640,000
CA 12/31/20 160,000
Problem 14

San Salvador Company acquired a machine for P3,200,000 on August 31,
2017. The machine has a 5-year useful life, a P500,000 residual value, and was
depreciated using the straight line method.
On May 31, 2020, 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, 2020 is P1,350,000 with no residual value.
What is the depreciation of the machine
for June 2020?

The UNDISCOUNTED net cash inflows cannot be considered as VIU. Since discount rate is not
available, VIU cannot be determined. Thus, the FVLCOD is the RA.
Aug 31, 2017 to May 31, 2020 is 33 mos. ; 5 yrs is 60 mos.
Cost 3,200,000
-AD
3.2M – 500 T
60 x 33 1,485,000  monthly depn is 45T
CA 5/31/20 1,715,000 > RA 1,350,000
IL 365,000
60 mos – 33 mos = 27 mos. Remaining
New CA - RV
1,350,000 - 0
27 mos. = 50,000  depn for June 2020
What is the depreciation for 2020?

Jan 1 to May 31 : 45,000 x 5 mos = 225,000
Jun 1 to Dec 31 : 50,000 x 7 mos = 350,000 575,000
Problem 15

On January 1,2016, Guyana Company acquired equipment for P1,000,000
with an estimated 10-year useful life. The entity estimated a P100,000
residual value and used the straight line method of depreciation.
During 2020, after the 2019 financial statements had been issued, the entity
determined that, due to obsolescence, this equipment had a remaining useful
life of only four more years and the residual value would be P40,000.
On December 31, 2020, what is the
carrying amount of the asset?

Cost 1,000,000
-AD
1M – 100 RV
10 x4 360,000
CA 12/31/19 640,000
-Depn in 2020
640 T – 40 RV
4 150,000
CA 12/31/20 490,000
Problem 16

On January 1, 2020, Curacao Company owned a machine having a carrying
amount of P2,400,000. The machine was purchased four years earlier for
P4,000,000 and depreciated using straight line.
During December 2020, the entity determined that the machine suffered
permanent impairment of the operational value and will not be
economically useful in the production process after December 31, 2020.
The entity sold the machine for P650,000 on January 5, 2021.
What amount should be recognized as
impairment loss for 2020?

Cost 4,000,000
-AD
4M–0
10 x 4 1,600,000  squeeze
CA 1/1/20 2,400,000  given
-Depn 2020
4M – 0 / 10 400,000
CA 12/31/20 2,000,000 > RA 650,000
IL 1,350,000
Problem 17

On January 1, 2020, Grenadines Company purchased equipment with a cost of
P11,000,000, useful life 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 at each year end:
Dec 31, 2020Dec 31, 2021

Fair value less cost of disposal 8,100,000 8,400,000
Value in use 8,550,000 8,200,000
a. What is the impairment loss for 2020?

Cost 11 M
-AD
11M – 0
10 x 1 1.1 M FVLCOD VIU
CA 12/31/20 9.9 M > RA 8.55 M 8.1 M vs 8.55 M
IL 1.35 M
b. What is the gain on reversal of
impairment for 2021?

CA 12/31/2020 8,550,000
-Depn 2021 FVLCOD vs VIU
8.55M - 0 8.4 M 8.2 M
9 950,000
CA 12/31/2021 7,600,000 < RA 8,400,000 *
no impairment loss ;
Gain on reversal of
impairment 800,000 ANSWER
*subject to limitation
LIMITATION : the new CA should NOT exceed
the CA assuming NO impairment loss is recognized
Cost 11,000,000
-AD
11M – 0
10 x 2 2,200,000 (2 yrs : 2020 to 2021)
CA 12/31/2021 8,800,000
* 8.4 M did not exceed the limitation of 8.8 M.

c. What is the depreciation for 2022?

8,400,000 – 0
8 yrs = 1,050,000
Problem 18

Puerto Rico 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?

VIU vs FVLCOD
(discounted CF) (sold stand-alone)
400,000 428,000
whichever is higher
RA 428,000
CA 450,000 > RA 428,000

IL 22,000
Problem 19

On January 1, 2017, Uruguay Company purchased equipment for
P5,600,000. The equipment had an 8-year useful life and residual value of
P800,000. The entity depreciated the equipment using the straight line
method.
In August 2020, the entity questioned the recoverability of the carrying

amount of the equipment.
On August 31, 2020, the discounted expected net future cash
inflows related to the continued use and eventual disposal of
the equipment total P3,500,000.
The fair value less cost of disposal of the equipment on such
date is P3,000,000.
After any loss on impairment has been recognized, what is the
carrying amount of the equipment?

8 yrs x 12 mos = 96 mos ; 1/1/17 to 8/31/20 is 44 mos.
Cost 5.6 M
-AD VIU vs FVLCOD
5.6 M – 800 T 3.5 M 3M
96 x 44 2.2 M
CA 8/31/20 3.4 M < RA 3.5 M
the asset is NOT impaired since CA < RA ;
therefore, CA is 3.4 M.
What is the CA of the equipment on 12/31/20?
CA 8/31/20 3,400,000
-Depn from Sept to Dec 20
5.6 M – 800 T
96 x 4 mos 200,000
CA 12/31/20 3,200,000
Problem 20

At the beginning of current year, Paraguay Company acquired another entity
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 acquiree:
Retailing 300,000
Service 200,000
Financing 400,000
Near the end of current year, 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
three major reporting units at year-end as follows:
Retailing 250,000
Service 100,000
Financing 600,000
a. What is the impairment of goodwill
attributable to Retailing unit?

CA of Goodwill Implied value of Impairment loss
Goodwill
(not the RA)*
Retailing 300,000 250,000 50,000
Service 200,000 100,000 100,000
Financing 400,000 600,000 none
* The RA of Goodwill as an individual asset cannot be determined since

Goodwill does not generate CF independently from other assets or group of
assets.
b. What is the impairment of goodwill
attributable to Service unit?

100,000
c. What is the impairment of goodwill
attributable to Financing unit?

0 or none
Problem 21

Panama Company is testing two reporting units for impairment of goodwill.
Info about results of such tests are shown below :
Telecomm Networking
Segment carrying amount
including goodwill 2,500,000 3,000,000
Carrying amount of goodwill 500,000 500,000
Estimated fair value of total 2,900,000 2,800,000
Estimated fair value
other than goodwill 2,100,000 2,500,000
What total amount should be reported as
impairment loss on goodwill?

CA of CGU Est. FV of Total Impairment loss
(including Assets of CGU
Goodwill)
Telecomm 2,500,000 2,900,000 0
Networking 3,000,000 2,800,000 200,000
After properly adjusting the goodwill for impairment,
what are the adjusted amount of Goodwill for each
CGU?

Telecomm Networking
CA of Goodwill 500,000 500,000
Less : Impairment 0 200,000
Adjusted amount of
Goodwill after 500,000 300,000
impairment
Problem 22

Brazil Company provided the following calculation about an impairment
loss recognized on December 31, 2020:
Goodwill Other 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 since the impairment loss was recognized. The
recoverable amount is now P8,000,000 on December 31, 2021.
The carrying amount of the assets would have been P7,200,000 on

December 31, 2021 if there was no impairment loss recognized on
December 31, 2020. Assets are depreciated at 20% reducing balance.
What amount should be recognized as gain on
reversal of impairment for 2021?

Other assets 9M
Goodwill 3M
CA 12/31/20 12 M > RA 7 M
IL 5 M
Less : allocated to
Goodwill (3M)
Allocated to Other
assets 2M
CA 12/31/20 7M
Less : Depn 2021
20% x 7M 1.4 M should not exceed
CA 12/31/21 5.6 M < RA 8 M 7.2 M
Gain on reversal of
impairment
2.4 M 1.6 M Answer
Problem 23 : Impairment of CGU ; with Corporate asset
not included in CA of CGU

Cuba Company has two cash generating units : Tobacco division and
Distilled spirits division. There is no goodwill allocated to the CGUs.
The carrying amounts of the CGUs are :
Tobacco 10,000,000
Distilled spirits 15,000,000
The company has a Head Office building that has not been included in
the CA of the CGUs and can be allocated to the CGUs on the basis of
CA.
The Head Office building has a carrying amount of 5,000,000.
The company calculated the value in use of the CGUs as follows
:
Tobacco 9,000,000
Distilled spirits 19,000,000
a. What is the Impairment loss of each
CGU?

Tobacco Distilled spirits
CA of CGU 10,000,000 15,000,000
Head office bldg.
allocated to CGU
T : 10/25 x 5 M 2,000,000
DS : 15/25 x 5 M 3,000,000
Total CA 12,000,000 18,000,000
RA : VIU 9,000,000 19,000,000
Impairment loss 3,000,000 0 or none
b. How is the impairment loss of Tobacco division
allocated to CGU assets and Corporate asset ?

CA Fraction Allocated
Impairment
Loss
Assets of
Tobacco Div 10,000,000 10/12 2,500,000
Corp assets
allocated to
Tobacco Div 2,000,000 2/12 500,000
12,000,000 3,000,000
c. What are the CA of assets of each CGU, and the
corporate asset after recording impairment?

CA before Impairment CA after
impairment impairment
Tobacco
division 10,000,000 2,500,000 7,500,000
Distilled spirits
division 15,000,000 0 15,000,000
Corporate asset
(Head Ofc bldg)
5,000,000 500,000 4,500,000
Problem 24 : Impairment of revalued asset ; Reversal of
impairment

On January 1, 2016, the revaluation of Haiti Company shows the following :
Machinery, cost 7,500,000
10-year life, 4 years expired
Sound value 7,200,000
On December 31, 2018, three years after the revaluation, an impairment
of the machinery is indicated and the recoverable amount (FVLCOD) is
1,575,000.
In 2019, there is a reversal of impairment related to machinery.
On December 31, 2019, the recoverable amount (FVLCOD) is
1,800,000.
a. What is the piecemeal realization of revaluation
surplus on December 31, 2016?

Years Cost Revalued Appreciation
Amount
Machinery 100 % 10 7,500,000 12,000,000 4,500,000
Accum Depn 40 % 4 3,000,000 4,800,000 1,800,000
Carrying Amt 60 % 6 4,500,000 7,200,000 2,700,000
6 6
1,200,000 450,000
b. What is the entry to record the impairment on
December 31, 2018?

Years Cost Revalued Reversal of
Amount Revaluation
Machinery 100 % 10 12,000,000 5,250,000 (6,750,000)
Accum Depn 70 % 7 8,400,000 3,675,000 (4,725,000)
4.8M
+ 1.2M x 3 3.6M
Carrying Amt 30 % 3 3,600,000 1,575,000 (2,025,000)
Divided by 3
525,000
Revaluation surplus 1/1/16 2,700,000
Less : Piecemeal realization
2016 to 2018
450,000 x 3 1,350,000
Revaluation surplus 12/31/18 1,350,000

Revaluation surplus 1,350,000
Revaluation loss/Impairment loss 675,000*
Machinery 6,750,000
c. What is the depreciation expense in
2019?

1,575,000 – 0
3 = 525,000
d. What is the entry to record the reversal of impairment
on December 31, 2019?

Years Cost Revalued Appreciation
Amount
Machinery 100 % 10 5,250,000 9,000,000 3,750,000
Accum Depn 80 % 8
12/31/18 3.675M
+ Depn 2019
525 T 4,200,000 7,200,000 3,000,000
Carrying Amt 20 % 2 1,050,000 1,800,000 750,000
Gain; then RS
Machinery 3,750,000
Gain on reversal of impairment 675,000*
Revaluation surplus 75,000
750 T – 675 T
*This was the amount of Impairment loss recorded on 12/31/18. Gain is limited to this amount; the excess
is credited to Revaluation surplus.
THIS PROBLEM IS DIFFERENT FROM REVERSAL OF IMPAIRMENT ONLY ; THIS IS REVERSAL

OF IMPAIRMENT OF AN ASSET THAT WAS PREVIOUSLY REVALUED.
Any reversal of an impairment loss on

a revalued asset shall be treated as a
revaluation increase 
REMEMBER
 credited to income to the extent that
it reverses a previous revaluation
decrease, and any excess credited
directly to revaluation surplus

2 - E. Problems - Impairment of Assets

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2 - E. Problems - Impairment of Assets

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LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

In addition, the remaining useful life of the equipment was reduced

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

Impairment loss 900,000

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

RA becomes the new CA 1,500,000

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

In January 2020, management determined the recoverable amount of

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

Impairment loss 1,125,000

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

It is believed that a discount rate of 8% is reflective of time value of money.

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

Impairment loss 14,747,000

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

Accumulated depreciation 1,750,000

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

1M is further allocated to Equipment and Inventory based on their

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

At year-end, the entity determined the value in use of the unit at

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

The entire 40 T is further allocated to Plant & equipment net.

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

The reasonable estimate of the amount expected to be recovered through

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

What is the depreciation for 2020?

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132

LEOPOLDO D. MEDINA, CPA, MSA ACFAR 2132