Saint Louis College

City of San Fernando, 2500 La Union

College of Commerce, Secretarial, and Accountancy

FINANCIAL ACCOUNTING AND REPORTING

Revaluation and Impairment of Assets (Individual Asset and Cash Generating Unit)

In Partial Fulfillment of the Requirements for the Subject,

Intermediate Accounting I

Presented to:
Bhandamme R. Paragas

Presented by:
Criselda G. Torricer
Konrad Lorenz M. Uychoco
Nicael Arvin Valmonte
Rachel A. Villanueva

May 2020
 CHAPTER 33: REVALUATION

Property, plant and equipment (PPE)

 Tangible assets (having physical substance);

 Used in business, such as:
o Production of goods;
o Rental; and
o Administrative purposes
 Long-term in nature (expected to be used for more than 1 year)
Examples of PPE:

 Land that is:

o Used in business
o For future plant site
 Building used in business
 Equipment used/held:
o For production of goods
o For environmental and safety reasons
o For rentals
 Major spare parts and long-lived stand-by equipment
 Furniture and fixture
 Bearer plants

Note: To be classified as PPE, it must be TUL:

1. Tangible
2. Used in business
3. Long-term in nature
Recognition

 An item of PPE is recognized if:

o It is probable that future economic benefits associated with the item will flow to the
entity; and
o The cost of the item can be measured reliably.

Measurement of property, plant and equipment

 Initial recognition: at cost

 After recognition:
o Cost model
o Revaluation model

Cost model

 Property, plant, and equipment shall be carried at cost less any accumulated depreciation and
any accumulated impairment losses.
o Formula = Cost – Accum . Depreciation – Accum . Impairment Losses
Revaluation model

 After recognition as an asset, any item of property, plant and equipment whose fair value can be
measured reliably can be carried at revalued amount.

Revalued amount = Fair value at revaluation date – subsequent accumulated depreciation –

subsequent accumulated impairment losses
 Frequency of revaluation depends upon changes in the fair value of property, plant and
equipment being revalued
 Revaluation necessary if fair value of asset revalued differs materially from carrying amount.

Revaluation of all items in an entire class

 When property plant and equipment are revalued, the entire class of property, plant and
equipment should be revalued.
o Class of property, plant and equipment – grouping of assets having similar nature and
use in entity’s operations, like:
 Land
 Land and buildings
 Machinery
 Ships
 Aircraft
 Motor vehicles
 Furniture and fixtures
 Office equipment
Basis of revaluation

 Fair value – determined by appraisal (undertaken by professional qualified valuers).

 Depreciated replacement cost – use only if market value is not available.

Definition of terms

 Revalued amount – fair value/depreciated replacement cost of the item of property, plant and
equipment.
o Note: If the problem states fair value, seek for the depreciated replacement cost and vice
versa.
 Fair value – price that would be received to sell an asset or paid to transfer a liability
 Depreciated replacement cost – replacement cost less corresponding accumulated
depreciation. Also known as the sound value of the asset.
 Replacement cost – current purchase price
 Carrying amount – historical cost less corresponding accumulated depreciation
 Revaluation surplus – fair value or depreciated replacement cost less carrying amount of
property, plant and equipment. Also known as revaluation increment
 Appreciation or revaluation increase – excess of revalued amount over historical cost
 Revaluation surplus – Appreciation less corresponding accumulated depreciation

Formulas list:

 Depreciated replacement cost or sound value or fair value = replacement cost –

accumulated depreciation at replacement cost
 Carrying amount = Historical cost – accumulated depreciation
 Revaluation surplus or revaluation increment = sound value – carrying amount
o Also: Appreciation – corresponding accumulated depreciation
 Appreciation = excess of revalued amount – historical cost
 Illustration:
The following data pertains to a machinery on the date of revaluation:

Cost Replacement Cost

Machinery P5,000,000 P7,500,000
Accumulated depreciation - Machinery ( 500,000 ) ( 1,000,000 )

1. To compute for the carrying amount:

Machinery (at cost) P5,000,000

Less: Accumulated depreciation – Machinery P 500,000
Carrying amount P4,500,000
The carrying amount is the cost of an asset, net of accumulated depreciation or accumulated impairment
losses.

2. To compute for the appreciation:

Replacement cost P7,500,000

Less: Cost P5,000,000
Appreciation P2,500,000

3. To compute for accumulated depreciation, appreciation:

Accumulated depreciation – Replacement cost P1,000,000

Less: Accumulated depreciation – cost P 500,000
Accumulated depreciation, appreciation P 500,000

4. To compute for the sound value/depreciated replacement cost:

Replacement cost P7,500,000

Less: Accumulated depreciation – replacement cost P1,000,000
Depreciated replacement cost P6,500,000

5. To compute for the revaluation surplus:

Depreciated replacement cost P6,500,000

Less: Carrying amount P4,500,000
Revaluation surplus P2,000,000

Statement presentation and classification

 Cost Replacement Cost
Machinery P5,000,000 P7,500,000
Accumulated depreciation - Machinery ( 500,000 ) ( 1,000,000 )
Carrying amount / Sound value P4,500,000 P6,500,000
 The equipment is classified as property, plant and equipment and presented as follows:

Replacement cost P7,500,000

Less: Accumulated depreciation – replacement cost P1,000,000
Depreciated replacement cost P6,500,000

The historical cost and the related accumulated depreciation shall be disclosed in the notes as
follows:

Accounting for revaluation

Illustration 1 – No change in useful life

The following data pertains to a machinery on revaluation date (January 1, 2020):

 Cost: P8,000,000
 Accumulated depreciation: P2,000,000
 Replacement cost: P12,000,000
 The machinery was revalued 5 years from the date of acquisition

To compute for the original useful life of the machinery:

Accumulated depreciation – cost P2,000,000

Divide: Age of the machinery 5 years
Annual depreciation P 400,000
Machinery at cost P8,000,000
Divide: Annual depreciation at cost 400,000
Original useful life 20 years

Approaches in recording revaluation

Proportional approach
a. Accumulated depreciation at revaluation date is restated proportionally with the change in
the gross carrying amount of the asset
b. Carrying amount after revaluation = Revalued amount
 Cost Replacement cost Appreciation

Machinery 8,000,000 12,000,000 4,000,000

Accumulated depreciation (2,000,000) (3,000,000) (1,000,000)
Carrying amount/Sound value/ 6,000,000 9,000,000 3,000,000
Revaluation surplus

To compute the accumulated depreciation of the machinery at replacement cost:

Accumulated depreciation at cost P2,000,000

Divide: Cost of machinery 8,000,000
Depreciation rate 25%
Multiply: Replacement cost of machinery 12,000,000
Accumulated depreciation at replacement cost P3,000,000

Journal entry to record the revaluation:

Date Explanations/Particulars Debit Credit

Jan. 1, 2020 Machinery P4,000,000
Accumulated depreciation P1,000,000
Revaluation surplus 3,000,000
To record revaluation of
machinery.

Elimination approach
i. Accumulated depreciation eliminated against gross carrying amount of the asset
ii. Net amount restated to revalued amount of asset
Using the previous problem:

 The accumulated depreciation is eliminated/offset against the gross carrying amount of the
machinery. This has the effect of eliminating the accumulated depreciation account to 0,
while the PPE is recorded at carrying amount (cost less accumulated depreciation).
 To conform with the depreciated replacement cost (sound value), the PPE will be adjusted.

Explanations/Particulars Debit Credit

Jan. 1, 2020 Accumulated depreciation P2,000,000
Machinery P2,000,000
To eliminate accumulated depreciation for
revaluation.

Machinery (9,000,000 – 6,000,000) 3,000,000

Revaluation surplus 3,000,000
To record revaluation surplus.

Annual depreciation subsequent to revaluation

The sound value is depreciated over the remaining life of the asset revalued. In order to compute for the
remaining life of the asset. Therefore:
 Date Explanation/Particulars Debit Credit
Dec. 31, 2020 Depreciation (9,000,000 / 15) 600,000
Accumulated depreciation 600,000
To record this year’s depreciation

Illustration 2 – Change in life and residual value

Cost Replacement Cost

Machinery 8,500,000 12,400,000
Residual value (500,000) (400,000)
Accumulated depreciation 3,200,000

Original useful life: 10 years

Revised useful life: 12 years from acquisition date

Given here are the cost of the machinery, its accumulated depreciation, and its residual value. However,
do we know how much is its yearly depreciation? Not yet, which is why we need to find first how much
the depreciation is for the machinery per year.
Depreciation is defined as the systematic allocation of the depreciable amount of an asset over the
useful life. The goal of depreciation is to have each period benefitting from the use of the asset bear an
equitable share of the asset cos. From these definitions, we have the following formula for a straight-line
depreciation (next page):

Cost-Residual Value
Depreciation=
Useful life (in years)
Given the formula, we should be able to compute for the depreciation of the machine per year

Php8,500,000-Php500,000
Depreciation= =Php800,000 (1 year depreciation )
10
Php3,200,000 ÷Php800,000=4 years depreciated ÷ 10 ye ars useful life= 40% depreciation

Cost Replacement Cost Appreciation

Machinery P8,500,000 P12,400,000 P3,900,000
Residual value (400,000) (400,000)
Depreciable amount 8,100,000 12,000,000 3,900,000
Accum. depreciation – 40% (3,200,000) (4,800,000) (1,600,000)
Remaining depreciable amount P4,900,000 P7,200,000 P2,300,000

Why is the residual value of the machinery at cost P400,000? Why not P500,000?

 Because the asset is revalued, the basis for the residual value at cost will be the same as the
replacement cost, as well.
o However, the initial P500,000 is used as basis for the computation of the accumulated
depreciation at cost.

Reversal of a revaluation surplus

  Revaluation decrease shall be charged directly against any revaluation surplus to the extent
that the decrease is a reversal of a previous revaluation and the balance is charged to expense.

Illustration
On January 01, 2019, the statement of financial position shows the following data concerning an
equipment:

 Equipment at cost: P5,000,000

 Accumulated depreciation (10-year life, 4 years expired): P2,000,000
Depreciated replacement cost: P4,800,000.
Computations:
1. Find rate of depreciation.

Accumulated depreciation P2,000,000

Divide: Equipment at cost 5,000,000
Proportion of accumulated depreciation 40%

2. Find the gross replacement cost

Sound value P4,800,000

Divide: Percentage of undepreciated asset 60%
Gross replacement cost P8,000,000

If the sound value is available, “gross up” the sound value or compute the gross replacement
cost.

Cost Replacement cost Appreciation

Equipment P5,000,000 P8,000,000 P3,000,000
Accumulated depreciation (40%) (2,000,000) (3,200,000) (1,200,000)
Carrying amount/ P3,000,000 P4,800,000 P1,800,000
Sound value/
Revaluation surplus

Another method using same illustration (devised by student):

Carrying amount of equipment at cost P3,000,000
Divide: Cost of equipment P5,000,000
Percentage of equipment undepreciated 60%

Note: Depreciated replacement cost is Replacement cost less accumulated depreciation at replacement
cost. If we know that Asset at cost less accumulated depreciation is carrying amount, then an identical
concept can be applied to the formula for depreciated replacement cost (sound value).

Going back to the illustration, we have P4,800,000 depreciated replacement cost. It’s like your carrying
amount but it’s for replacement cost. Therefore:
Sound value P4,800,000
Divide: Percentage of undepreciated asset 60%
Gross replacement cost P8,000,000

Journal entries

Date Explanations/Particulars Debit Credit

Jan. 1, 2019 Equipment P3,000,000
Accumulated depreciation P1,200,000
Revaluation surplus 1,800,000
To record revaluation of equipment.

Dec. 31, 2019 Depreciation 800,000

Accumulated depreciation 800,000
To record 1 year depreciation.

Revaluation surplus 300,000

Retained earnings 300,000
To record revaluation surplus.

Dec. 30, 2020 Depreciation 800,000

Accumulated depreciation 800,000
To record 1 year depreciation.

Revaluation surplus 300,000

Retained earnings 300,000
To record revaluation surplus.

Dec. 31, 2021 Depreciation 800,000

Accumulated depreciation 800,000
To record 1 year depreciation.

Revaluation surplus 300,000

Retained earnings 300,000
To record revaluation surplus.

Adjusted Balance of Sound Value (as of Dec. 31, 2020)

Equipment P8,000,000
Less: Accumulated depreciation (P3,200,000 + P2,400,000) P5,600,000
Sound Value (Depreciated replacement cost) P2,400,000

Revaluation surplus (P1,800,000 – 900,000) P900,000

Change in fair value
On January 1, 2022, the fair value of the equipment is determined to be P1,050,000.
Analysis:
1. There is a revaluation decrease of P1,350,000, computed as sound value less fair value
(P2,400,000 – P1,350,000).
2. From 4 years expired, plus 3 years from revaluation date, the asset is now 7 years expired. We
only have 10 years of useful life, but 7 years have been expired (or depreciated). Therefore, there
is 3 years remaining to the life of the asset.
3. The revaluation decrease should be charged first against:
a. P900,000 revaluation surplus; and
b. P450,000 to revaluation loss.

Computations:
Fair value at 2022 P1,050,000
Divide: Percentage of asset unexpired 30%
Gross replacement cost P3,500,000

Per book Adjusted Decrease

Replacement cost P8,000,000 P3,500,000 P4,500,000
Accumulated depreciation (70%) (5,600,000) (2,450,000) (3,150,000)
Depreciated replacement cost P2,40,000 P1,050,000 P1,350,000

Jan. 1, 2020 Accumulated depreciation 3,150,000

Revaluation surplus 900,000
Revaluation loss 450,000
Equipment 4,500,000
To record decrease in fair value of asset.

Note that, since there are 3 years remaining in the useful life of the asset, the annual depreciation is
computed as P1,050,000 / 3 to get P350,000 per year.

Sale of revalued asset

 All accounts related to revaluation of an asset are closed to determine the gain (loss) on the sale
 Sale price – carrying amount of revalued asset = Gain (loss)

Illustration

 Building: P50,000,000
 Accumulated depreciation: P30,000,000
 Revaluation surplus: P4,000,000
 Sale price: P22,000,000
To compute for the gain/loss on sale:
Sale price P22,000,000
Less: Carrying amount of building 20,000,000
Gain on sale of building P 2,000,000

Cash P22,000,000
Accumulated depreciation 30,000,000
Building P50,000,000
Gain on sale of building 2,000,000
To record sale of revalued building.

Revaluation surplus 4,000,000

Retained earnings 4,000,000
To record realization of revaluation
surplus.

Disclosures related to revaluation

a. Effective date of revaluation
b. Whether an independent valuer was involved
c. Method and significant assumptions applied in estimating fair value
d. Extent to which the fair value was determined directly by reference to observable prices in an
active market or recent market transactions
e. Historical cost and carrying amount of each lass of revalued PPE
f. Revaluation surplus

Treatment of revaluation surplus

 Increase in carrying amount resulting from revaluation is credited to other comprehensive

income
 When realized, revaluation surplus may be transferred to retained earnings directly
 Upon retirement/disposal of asset, whole surplus may be realized
 If revalued asset is being depreciated, part of the surplus is being realized as the asset is
used.
Summary:

 Property, plant, and equipment is initially recognized at cost, then the entity should either use
the:
o Cost method – carried at cost less accumulated depreciation and impairment losses;
o Fair value method – applicable if fair value can be measured reliably.
 If the asset revalued has no useful life, the procedures are:
 Compute annual depreciation;
 Compute original useful life of the asset;
 Find the depreciation rate by dividing the accumulated depreciation by the cost of the
asset.
 If the asset revalued will have a change in life and residual value, then the procedures are:
 Compute annual depreciation;
 Compute age of the asset;
 Compute for the percentage of asset depreciated;
 The new residual value will be the basis for remaining depreciable amount for both
cost and replacement cost; however, original residual value must be considered in
determining the remaining depreciable amount based on cost.
 MULTIPLE CHOICE – THEORIES

1. Subsequent to initial recognition, an entity shall use this model to account for its items of property,
plant, and equipment

A. Cost model
B. Revaluation model
C. Fair value model
D. A or B as an accounting policy choice

Answer: A.
Reference: Intermediate Accounting 1B 2019, Z.V. Millan, p. 197

2. The carrying amount of an item of property, plant and equipment subsequently accounted for under
the cost model is equal to

A. the historical cost less any accumulated depreciation

B. the fair value less any accumulated depreciation
C. the historical cost less any accumulated depreciation and any accumulated impairment loss
D. the fair value less any accumulated depreciation and any accumulated impairment loss

Answer: A.
Reference: Intermediate Accounting 1B 2019, Z.V. Millan, p. 197

3. Revaluation surplus is equal to

A. Fair value minus carrying amount

B. Carrying amount minus depreciated replacement cost
C. Value in use less Present value of future cash flow
D. Present value of future cash flows less carrying amount

Answer: A.
Reference: Intermediate Accounting 1B 2019, Z.V. Millan, p. 199

4. Revaluation of items of property, plant and equipment is made

A. Simultaneously
B. Every year
C. On all assets in a class
D. A and C

Answer: D
Reference: Intermediate Accounting 1B 2019, Z.V. Millan, p. 199
5. Revaluations of items of property, plant and equipment are recorded using the

A. Proportional method
B. Elimination method
C. Replacement method
D. A or B

Answer: D.
Reference: Intermediate Accounting 1B 2019, Z.V. Millan, p. 200

6. An entity owns a fleet of cars and ships. The entity operates on a capital intensive industry and thus
has significant other property, plant and equipment. Which of the following statements is correct?

A. Revalue only one-half of each class of property, plant and equipment as that method is less
cumbersome and easy compared to revaluing all assets together
B. Revalue an entire class of property, plant and equipment
C. Revalue one ship at a time as it is easier than revaluing all ships together
D. Since assets are being revalued regularly, there is no need to depreciate.

Answer: B.
Reference: Theory of Accounts Volume 1 2012, C. Valix, p. 815

7. The revaluation surplus resulting from initial revaluation of property, plant and equipment shall be
treated in which one of the following?

A. Credited to retained earnings

B. Released to the income statement an amount equal to the difference between the depreciation
calculated on historical cost vis-à-vis revalued amount
C. Deducted from current assets and added to the property, plant and equipment
D. Debited to the class of property, plant, and equipment revalued and credited to “revaluation
surplus”

Answer: D.
Reference: Theory of Accounts Volume 1 2012, C. Valix, p. 815

8. When an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be

A. Recognized in profit or loss

B. Charged to retained earnings
C. Debited to equity
D. Charged to revaluation surplus

Answer: D.
Reference: Theory of Accounts Volume 1 2012, C. Valix, p. 815
9. Which of the following statements is incorrect concerning the class of property, plant and equipment
to be revalued?

A. When an item of property, plant and equipment is revalued, the entire class of property, plant and
equipment to which that asset belongs shall be revalued
B. A class of property, plant and equipment is a grouping of assets of a similar nature and use in an
entity’s operations
C. The items within a class of property, plant and equipment are revalued selectively
D. A class of assets may be revalued on a rolling basis provided revaluation of the class of assets is
completed within a short period of time and provided the revaluations are kept up to date

Answer: C.
Reference: Theory of Accounts Volume 1 2012, C. Valix, p. 828

10. What is the treatment of the accumulated depreciation on the date of revaluation?

I. Restated proportionately with the change in the gross carrying amount of the asset so
that the carrying amount after revaluation equals the revalued amount.
II. Eliminated against the gross carrying amount of the asset and the net amount restated to
the revalued amount of the asset.

A. I only
B. II only
C. Either I or II
D. Neither I nor II

Answer: B.
Reference: Theory of Accounts Volume 1 2012, C. Valix, p.812

11. Under the cost model, the gain or loss on disposal of an item of property, plant and equipment is
computed as

A. The difference between the net disposal proceeds and the carrying amount
B. The difference between the net disposal proceeds and the revalued amount
C. The difference between the net disposal proceeds and accumulated depreciation
D. The difference between the sale price and the carrying amount

Answer: A.
Reference: Intermediate Accounting 1B 2019, Z.V. Millan, p. 201

12. This fair valuation technique uses prices and other relevant information generated by market
transactions involving identical or comparable assets, liabilities, or a group of assets and liabilities

A. Market approach
B. Proportional approach
C. Income approach
 D. Cost approach

Answer: A.
Reference: Intermediate Accounting 1B 2019, Z.V. Millan, p. 200

13. Which of the following is not an acceptable method of measuring the fair value of a property that is
being revalued?

A. Market approach
B. Proportional approach
C. Income approach
D. Cost approach

Answer: B.
Reference: Intermediate Accounting 1B 2019, Z.V. Millan, p. 199

14. Using the cost model, how are property, plant and equipment measured on the statement of financial
position?

A. At replacement cost less accumulated depreciation and accumulated impairment losses

B. At historical cost less salvage value
C. At original cost adjusted for general price level changes
D. At acquisition cost less depreciated portion thereof and less accumulated impairment loss

Answer: D.
Reference: Intermediate Accounting 2010, P. Empleo, p.356

15. After initial recognition of exploration and evaluation assets, they are measured in the statement of
financial position using

A. Cost model
B. Revaluation model
C. Either cost model or revaluation model, based on the accounting policy adopted by the enterprise
D. Fair value model

Answer: C.
Reference: Intermediate Accounting 2010, P. Empleo, p. 361
 MULTIPLE CHOICE – PROBLEMS

Problem I
Cool Company owned an equipment costing ₱5,200,000 with original residual value of ₱400,000. The life
of the asset is 10 years and was depreciated using the straight line method.
The equipment has a replacement cost of ₱8,000,000 with residual value of ₱200,000. The age of the
asset is 4 years.
The appraisal of the equipment showed a total revised useful life of 12 years and the entity decided to
carry the equipment at revalued amount.
Ignoring the income tax, what amount should be initially reported as revaluation surplus?
A. 1,600,000
B. 2,600,000
C. 1,680,000
D. 6,680,000

Answer: A

Replacement
Cost Cost Appreciation
Equipment ₱ 5,200,000 ₱ 8,000,000 ₱ 2,800,000
Less: Residual value 200,000 200,000 0
Depreciation amount 5,000,000 7,800,000 2,800,000
Less: Accumulated
depreciation
(40% x 4,800,000) 1,920,000 - 0
(40% x 7,800,000) - 3,120,000 1,200,000
Balance ₱ 3,080,000 ₱ 4,680,000 ₱ 1,600,000

Percentage of accumulated depreciation

(4 years expired/ 10 years original life) 40%

Reference:
Practical Accounting One Volume 1, 2014 edition, C Valix, p. 658

Problem II
On Jan 1, 2014, the historical balances of the land and the building of Sabangan Company are

Cost Accumulated Depreciation

Land 50,000,000 0
Building 300,000,000 90,000,000
The land and building were revalued on January 1, 2014 and the revaluation revealed the following sound
value.

Land 70,000,000
Building 315,000,000

There were no additions or disposals during 2014. Depreciation is computed on straight line. The
estimated life of the building is 20 years.
Ignoring income tax, what amount should be reported as revaluation surplus on December 31, 2014?
A. 117,500,000
B. 125,000,000
C. 105,000,000
D. 119,750,000

Answer: A
Percentage of accumulated depreciation
(90,000,000/300,000,000) 30%
Remaining useful life (70% x 20 years) 14 years

Sound value Carrying amount Revaluation surplus

₱ ₱ ₱
Land 70,000,000.00 50,000,000.00 20,000,000.00
Building 315,000,000 210,000,000 105,000,000
Total 385,000,000 260,000,000 125,000,000
Less: Piecemeal realization in 2014 (105,000,000/14) 7,500,000
Revaluation surplus- December 31,2014 ₱ 117,500,000.00

Reference:
Practical Accounting One Volume 1, 2014 edition, C Valix, p. 659

Problem III
On June 30,2014, Louisiana Company reported the following information:
Equipment at cost 5,000,000
Accumulated Depreciation 1,500,000
The equipment was measured using the cost mode and depreciation on a straight line basis over a 10-
year period. On December 31, 2014, the management decided to change the basis of measuring the
equipment from the cost model to revaluation model.
The equipment was recorded at fair value of ₱4,550,000 with remaining useful life of 5 years.
Ignoring income tax what amount should be reported as revaluation surplus on December 31, 2014?
A. 1,050,000
B. 1,300,000
C. 1,500,000
D. 2,000,000
Answer: B

Cost-June 30, 2014 ₱ 5,000,000

Less: Accumulated depreciation 1,500,000
Carrying amount- June 30, 2014 3,500,000
less: Depreciation from July 1 to Dec. 31, 2014
(5,000,000/10x6/12) 250,000
Carrying amount- December 30, 2014 ₱3,250,000

Fair value- December 31,2014 ₱ 4,550,000

Less: Carrying amount- December 31, 2014 3,250,000
Revaluation surplus-December 31, 2014 ₱1,300,000

Reference:
Practical Accounting One Volume 1, 2014 edition, C Valix, p. 662

Problem IV
On January 1, 2009, Boston Company purchased a new building at a cost of ₱6,000,000. Depreciation
was computed on the straight line basis at 4% per year. On January 1, 2014, the building was revalued at
a fair value of ₱8,000,000.
What is the depreciation for 2014?
A. 320,000
B. 400,000
C. 100,000
D. 240,000

Answer: B

Accumulated depreciation (4%x5years expired) 20%

Life of asset 25 years

Less: Expired 5
Remaining life 20

Depreciation for 2014(8,000,000/20) ₱400,000

Reference:
Practical Accounting One Volume 1, 2014 edition, C Valix, p. 663
Problem V
On June 30,2019, Clandestine Company reported the following information related to equipment:
Equipment at cost 5,000,000
Accumulated Depreciation 1,500,000
The equipment was measured using the cost model and depreciation on straight line basis over a 10-year
period.
On December 31, 2019, the entity decided to change the basis of measuring the equipment from the cost
model to the revaluation model.
On the revaluation date, the equipment had a fair value of 4,500,000 with an expected remaining useful
llife of 5 years.

What is included in the journal entry to record the revaluation on December 31,2019?
A. Debit machinery 1,300,000
B. Credit accumulated depreciation 2,450,000
C. Credit accumulated depreciation 700,000
D. Debit accumulated depreciation 1,750,000

Answer: C

Cost- 6/30/2019 ₱ 5,000,000

Less: Accumulated depreciation 1,500,000

Carrying amount- 6/30/2019 3,500,000

Less: Depreciation-07/01-12/31,2019
(5,000,000/10x6/12) 250,000

Carrying amount- 12/31/2019 ₱ 3,250,000

Fair value-12/31/2019 ₱ 4,550,000

Carrying amount- 12/31,2019 3,250,000

Revaluation surplus- 12/31/2019 ₱ 1,300,000

Replacement
Cost cost Appreciation
₱
Equipment (4,550,000/65%) ₱ 5,000,000 7,000,000 ₱ 2,000,000
Less: Accumulated depreciation-35% 1,750,000 2,450,000 700,000
₱
Depreciable amount ₱ 3,250,000 4,550,000 ₱ 1,300,000
Equipment ₱ 2,000,000 Reference:
Accumulated depreciation ₱ 700,000
Revaluation surplus 1,300,000
To record the revaluation
surplus

Intermediate Accounting 2019, Volume 1, C Valix, p.839

Problem VI,VII.VIII
Seaside Company applied revaluation accounting to plant asset with carrying amount of 4,000,000 on
January 1, 2014, useful life of 4 years, and no residual value. Depreciation is calculated on the straight
line basis.
On December 31, 2014, independent appraisers determined that the asset has a fair value of 3,750,000.
1. What is the journal entry to record the revaluation on December 31,2014?
A. Debit accumulated depreciation 250,000
B. Credit depreciation 750,000
C. Credit plant asset 750,000
D. Credit revaluation surplus 750,000
2. The financial statement for 2014 shall include which of the following information?
A. Accumulated depreciation 1,000,000
B. Depreciation 250,000
C. Plant asset 3,750,000
D. Revaluation surplus 250,000
3. What is the journal entry to record depreciation for 2015?
A. Debit accumulated depreciation 1,000,000
B. Debit depreciation 1,250,000
C. Credit accumulated depreciation 750,000
D. Debit depreciation 1,000,000

Question 1 Answer: D

Cost Fair value Appreciation

Plant asset 100% ₱ 4,000,000 ₱ 5,000,000 ₱ 1,000,000
Less: Accumulated depreciation 25% 1,000,000 1,250,000 250,000
CA/SV/RS 75% ₱ 3,000,000 ₱ 3,750,000 ₱ 750,000

Plant asset ₱ 1,000,000

Accumulated depreciation ₱ 250,000
Revaluation surplus 750,000

Question 2 Answer: C

Plant asset-December 31,2014 ₱ 5,000,000

Less: Accumulated depreciation- December 31,2014 1,250,000
 SV/CA after revaluation ₱ 3,750,000

Question 3 Answer: B

Depreciation (3,750,000/3) ₱ 1,250,000

Accumulated depreciation ₱ 1,250,000

Reference:
Practical Accounting One Volume 1, 2014 edition, C Valix, p. 654-655

Problem IX,X
The statement of financial position of Angklung company Company on December 31, 2014, showed the
following property , plant, and equipment terms after recording depreciation:

Building ₱ 6,000,000
Less: Accumulated depreciation 2,000,000 ₱ 4,000,000

Motor vehicle 2,400,000

Less: Accumulated depreciation 800,000 1,600,000

Angklung has adopted the revaluation model for the valuation of its PPE. This has resulted in the
recognition in prior periods of an asset revaluation surplus for the building of 280,000. On December 31,
2014 , an independent appraiser assessed the fair value of the building to be 3,200,000 and the vehicle to
be 1,800,000. Assume that the building and the motor vehicle have remaining useful lives of 25 yaers and
4 years, respectively, with zero residual value. The company uses the straight-line depreciation method.
Ignore income tax implications.
1. The entry to record the revaluation of the building should include a debit to
Revaluation Surplus Revaluation Loss
A. 800,000 0
B. 280,000 520,000
C. 0 800,000
D. 520,000 280,000
2. What is the depreciation for 2014?
A. 82,000
B. 461,200
C. 578,000
D. 560,000

Question 1 Answer: B
Carrying Revalued
Value Amount Decrease
 ₱ ₱ ₱
Builiding 6,000,000 6,000,000 6,000,000
Less: Accumulated Depreciation(1/3) 2,000,000 1,600,000 400,000
₱ ₱ ₱
Net (2/3) 4,000,000 4,400,000 5,600,000

Journal entry(elimination approach)

400,0
Accumulated depreciation - builiding 00
280,0
Revaluation surplus 00
520,0
Revaluation loss (800,000-280,000) 00

1,200,0
Builiding 00

Question 2 Answer: C

Building (3,200,000/25) ₱ 128,000

Motor vehicle (1,800,000/4) 450,000
Total ₱ 578,000

Reference:
CPA Examination Reviewers: Auditing Problems, 2014 Edition G. Roque, p 472-474
 CHAPTER 34: IMPAIRMENT OF ASSET 
INDIVIDUAL ASSET

Impairment 
- Fall in market value of an asset so that the recoverable amount is now less than the carrying
amount in the financial statement
o Carrying amount – amount at which an asset is recognized in the statement of financial
position after deducting:
 Accumulated depreciation
 Accumulated impairment loss
Impairment Loss 
- Amount by which carrying amount of an asset exceeds its recoverable amount
o In short: Carrying amount > Recoverable amount

Carrying amount 
- Amount at which an asset is recognized in the statement of financial position AFTER deducting
accumulated depreciation and accumulated impairment loss.
Recoverable Amount
- Asset in its fair value less cost to sell or value in use, whichever is higher

BASIC PRINCIPLE 
- The asset SHALL NOT be carried AT ABOVE the recoverable amount
- However, in case the carrying amount is not recoverable in full, the entity shall write down the
carrying amount as the recoverable amount
▪ Carrying Amount > Recoverable Amount = Impairment Loss; therefore, the asset shall be reduced
by the amount of the IMPAIRMENT LOSS

ACCOUNTING FOR IMPAIRMENT 

A. Indication of Possible Impairment 

- An entity shall assess at each reporting date whether there is any indication that an asset
may be impaired
- Intangible Asset with an indefinite useful life or an intangible asset not yet available
for use for impartial annually shall undergo a test where in its carrying amount and
recoverable amount will be compared
- Under paragraph 12 of International Accounting Standards 36, Impairment of Assets it
states the indicators grouped into EXTERNAL SOURCES and INTERNAL SOURCES

External Sources of Information:

1. An asset’s market value has declined significantly during the period.
2. Significant changes in the technological, market, economic or legal environment with the adverse
effect on the enterprise, have taken place or will take place in the near future.
3. 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.
4. The carrying amount of the net assets of the reporting enterprise in more than its market
capitalization.
Internal Sources of Information:
1. Evidence of obsolescence or physical damage of an asset.
2. Significant changes in the extent or manner in which an asset is used or is expected to be used
with the adverse effect on the enterprise.
3. Evidence indicating that the economic performance of an asset is, or will be, worse than
expected. 

B. Measurement of Recoverable Amount

- The entity shall consider between :
o Fair Value less Cost of Disposal 
o Value in use
- and whichever is higher will be considered as the recoverable amount of the
asset

a. Fair Value less Cost of Disposal 

- it is equal to the exit price or selling price of an asset minus cost of disposal 
o Fair value less cost of disposal = selling price (or exit price) – cost of disposal
 Fair Value is the price that would be received to sell the asset in an orderly
transaction between market participants at the measurement date
 Cost of Disposal - incremental cost directly attributable to the disposal of
an asset or cash generating unit, excluding finance cost and income tax
expense
Examples :
1. legal cost
2. stamp duty and similar transaction taxes
3. cost of removing the asset
4. direct cost in bringing the asset into condition for sale

FAIR VALUE HIERARCHY 

- Under PFRS 13, paragraph 72 it states the fair value hierarchy:

Level 1 
- inputs are the quoted prices in an active market for identical asset 
- quoted price - it provides most reliable evidence of fair value : shall be used without
adjustment

Level 2
- inputs are observable either directly or indirectly 
- it includes quoted prices for similar assets in an active market
- quotes prices for identical or similar assets in a market that is not active

Level 3
- inputs are unobservable inputs for the asset
- unobservable inputs - usually developed by using the best available information from the
entity’s own data

Active Market 
- it is a market in which transactions for the asset take place with sufficient regularity and
volume to provide pricing information on an ongoing basis
- the items traded within the market are homogenous
- willing buyers and sellers can normally be found at any time
- prices are available to the public

Principal Market
- it is a market with the greatest volume and level of activity for the asset
 Market Participants 
- these are the buyers and sellers in the principal market who are
o independent 
o knowledgeable
o willing

Value in Use
- measured as the present value of estimated future net cash flows expected to be derived
from an asset
- cash flows are pretax cash flows, and pretax discount rate is applied in determining the
present value

Under PAS 36 it provides the following 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 as
increasing rate can be justified

COMPONENTS OF ESTIMATED FUTURE CASH FLOW

Cash inflow
- Money received by a company or a business that could be from financial activities like sales,
investments or income.
Cash outflow
- It is the opposite of cash inflow, these are money paid to suppliers, banks, and other parties.
Net cash flow
- It refers to the difference between a company’s cash inflows and outflows. It also refers to the
change in a company’s cash balance as detailed on its cash flow statement
Estimated 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 meaningful life in
an arm’s length transaction
Estimated future cash flows do not include:
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
Illustration ;
DEF Manufacturing Company uses a machinery in its operations. The machinery was acquired
on January 1, 2020 at a cost of P550,000. It has as estimated useful life of eight years and an estimated
residual value of P50,000 at the end of its useful life. The company uses straight-line method of
depreciation. As a result of a recent development in technology, DEF reviews the machinery for
impairment.
At the beginning of 2020, it is estimated that total remaining cash inflows attributable to the asset
are estimated to be P600,000, (P100,00 at the end of each year) while total cash outflow in using and
maintaining the machine are estimated to be P54,000 a year, expected to be uncured at the end of each
year. Based on current prices and the condition of the asset, DEF estimates the fair value of the
machinery to be P200,000. The disposal cost of the asset is approximately P25,000. DEF plans to
continue using the asset in production even at a significantly lower rate of utilization. The company’s
discount rate is 10%.
Analysis and computations:
Carrying value, January 1, 2020:
Cost P550,000
Less : Accumulated Depreciation
(550,000-50,000)/8 x 2 years 125,000

Carrying value P425,000

Recoverable cash inflows for the remaining 6 years:

Cash inflows P100,000
Less: Cash outflows 54,000

Estimated future cash flow P46,000

Value in use:
P46,000 x 4.3553 P200,344
P50,000 x 0.5645 28,225

Total value in use P228,569

Fair value less cost of disposal:

Fair market value P200,000
Less: Disposal cost 25,000

Fair value less cost of disposal P175,000

The value in use, which is P228,569, is the recoverable amount since it is higher than the net
selling price of P175,000.
Impairment loss:
Carrying value P425,000
Recoverable amount 228,567

Impairment loss P196,433

The impairment loss is, then, recorded as:

Impairment Loss 196,433

Accumulated Depreciation 196,433
 C. Recognition of Impairment Loss
The basic principle is that if an asset’s recoverable amount is lower than its carrying
amount, the asset is judge to have suffered an impairment loss

Accordingly, the impairment loss shall be recorded immediately by reducing the asset’s
carrying amount to its recoverable amount

The impairment loss is recognized in profit or loss and presented separately in the
income statement

REVERSAL OF IMPAIRMENT LOSS

Under PAS 36, Paragraph 114 it provides that an impairment loss recognized for an asset in
prior years shall be reversed if there has been a change in the estimate of the recoverable amount
Recoverable Amount > Current Carrying Amount = Carrying Amount shall be
(previously been impaired) increased to new recoverable amount

However, Under PAS 36, Paragraph 117 it provides that the “increased carrying amount of an
asset due to reversal of 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 shall be recognized immediately as income in the income statement

 Any reversal of an impairment loss on revalued asset shall be CREDITED to INCOME to the
extent that it reverses a previous revaluation decrease and any excess credited directly to
revaluation surplus

Illustration :

A piece of equipment costing P2,400,000 and with accumulated depreciation of P600,000 is

tested for possible impairment. It is found to have a fair value less cost of disposal of P1,100,000 and
value in use of P1,200,000. It is further determined that the remaining useful life of the asset is six years.
The impairment is then recorded as follows:

Impairment Loss 600,000

Accumulated Depreciation 600,000

Carrying value (2,400,000 – 600,000) P1,800,000

Recoverable amount
(the higher between P1,100,000
and P1,200,000) 1,200,000

Impairment loss P600,000

Assuming that the enterprise uses straight-line method, the annual depreciation after recording
impairment is P200,000 which is derived by dividing the recoverable amount, P1,200,000 (the adjusted
carrying amount) over the remaining useful life of 6 years.
 Further assume that two years after recording the initial impairment, the asset is evaluated and is
found to have a recoverable amount of P900,000.
The asset’s carrying value and the recovery of impairment are computed as follows;

Cost P2,400,000
Accumulated Depreciation
600,000 + 600,000 + (2x200,000) 1,600,000

Carrying value P800,000

Recoverable amount 900,000

Increase in the value of the asset P100,000

To test whether the recovery of P100,000 as computed above may be fully recognized, it is
necessary to determine the limit on the carrying value of the asset after recording the recovery. Using the
cost model, the asset should not be carried at an amount that exceed the carrying value had no
impairment loss been previously recorded.

The asset illustrated above shall have a carrying value of P1,200,000 if no impairment had been
previously recorded, as follows:

Cost P2,400,000
Accumulated Depreciation
Prior to impairment P600,000
Depreciation expense for
2 years (1,800,000/6) x 2 600,000 1,200,000

Carrying value (no impairment) P1,200,000

Because the new recoverable amount does not exceed the carrying value had no impairment loss
been recorded, the recovery of P100,000 is fully recognized in profit or loss.

The entry for the reversal of the impairment loss is as follows:

Accumulated Depreciation 100,000

Recovery of Previous Impairment Loss 100,000

Assume instead that two years after recording the initial impairment loss, the asset is evaluated
and is found to have a recoverable amount of P1,250,000. The increase in asset value is computed as
follows:

Cost P2,400,000
Accumulated Depreciation
600,000 + 600,000 + (2x200,000) 1,600,000

Carrying value P800,000

Recoverable amount 1,250,000

Increase in value P450,000

 If the full increase in asset value shall be recorded, the asset shall be carried at P1,250,000 which
already exceeds the asset’s carrying value had no impairment loss been previously recorded
(P1,200,000).

Cost P2,400,000
Accumulated Depreciation
Prior to impairment P600,000
Depreciation expense for
2 years (1,800,000/6) x 2 600,000 1,200,000

Carrying value (no impairment) P1,200,000

The limit of the carrying value is, therefore, P1,200,000 and the recovery is recorded as follows:

Accumulated Depreciation 400,000

Recovery of Previous Impairment Loss 400,000
(1,200,000 – 800,000)

The above recovery may be computed as follows:

Initial impairment loss P600,000

Recovered through lower depreciation
After impairment
Depreciation without impairment P300,000
Depreciation with impairment 200,000

Difference P100,000
x 2 years 200,000

Limit on recovery P400,000

Summary
- Impairment is a fall in market value of an asset so that the recoverable amount is now less
than the carrying amount in the financial statement
- The asset SHALL NOT be carried AT ABOVE the recoverable amount

- ACCOUNTING FOR IMPAIRMENT 

▪ Indication of Possible Impairment 
▪ Measurement of Recoverable Amount
The entity shall consider between :
 Fair Value less Cost of Disposal 
 Value in use
 MULTIPLE CHOICE – THEORIES

1. Fair value less cost to sell is the

I. Amount obtainable from the sale of an asset in arm’s length transaction between
knowledgeable and willing parties, less cost of disposal
II. Present value of estimated future cash flows expected to arise from the continuing use of
an asset and from its disposal at the end of its useful life

A. I only
B. II only
C. Both I and II
D. Neither I nor II

Answer: A

Reference: Theory of Accounts, C. Valix, 2012, p.824

2. What is the best evidence of fair value less cost to sell? 

A. Sales price in a binding sale agreement in an arm’s length transaction 

B. Market value or fair value in an active market
C. Best estimate of knowledgeable and willing parties in an arm’s length transaction 
D. Sales price in a binding sale agreement in an arm’s length transaction or fair value in an active
market, whichever is higher

Answer: A

Reference: Theory of Accounts, C. Valix, 2012, p.824

3. The estimates of future cash flows in calculating value in use include all the following, except :

A. Cash inflows from the continuing use of the asset

B. Cash outflows incurred to generate the cash inflows from the continuing use of the asset
C. Net cash flows from the disposal of the asset at the end of its useful life
D. Future costs of improving or enhancing the asset’s performance

Answer: D

Reference: Theory of Accounts, C. Valix, 2012, p.825

4. The external sources of information indicating possible impairment include all of the following,
except:

A. Significant change in the technological, market, legal or economic environment of the business in
which the asset is employed
B. 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
C. The carrying amount of the net assets of the entity is more than the market capitalization
D. Significant decrease in budgeted net cash flows or significant increase in budgeted loss flowing
from the asset
Answer: D

Reference: Theory of Accounts, C. Valix, 2012, p.827

5. Which of the following statements is true in 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 future period shall be
adjusted to allocate the revised carrying amount, less residual value, on a systematic
basic over the remaining useful life

A. I only
B. II only
C. Both I and II
D. Neither I nor II

Answer: C

Reference : Theory of Accounts, C. Valix, 2012, p.827

6. Cost to sell include all of the following, except:

A. Legal costs 
B. Stamps and similar transaction taxes
C. Cost of removing the asset 
D. Finance cost

Answer: D

Reference: Theory of Accounts, C. Valix, 2012, p.825

7. Which of the following statements is incorrect concerning the reversal of an impairment loss?

I. The reversal of the impairment loss shall be 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

A. I only
B. II only
C. Both I and II
D. Neither I nor II
Answer: A

Reference: Theory of Accounts, C. Valix, 2012, p.829

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

A. The asset is not amortized

B. The recoverable amount is the value in use
C. The net realizable value is used
D. The carrying amount of the asset remains the same
Answer: B

Reference: Theory of Accounts, C. Valix, 2012, p.830

9. An impairment loss that relates to an asset that has been revalued shall be recognized in

A. Profit or loss
B. Revaluation surplus that relates to the revalued asset
C. Opening retained earnings
D. Any reserve in equity

Answer: B

Reference: Theory of Accounts, C. Valix, 2012, p.831

10. Which of the following statements best describes “value in use”?

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

Answer: A

Reference: Theory of Accounts, C. Valix, 2012, p.831

11. Which of the following is not relevant in determining an asset’s “value in use”?

A. The expected future cash flows from the asset

B. The carrying amount of the asset
C. Expectation about possible variation in the amount and timing of future cash flows
D. The time value of money

Answer: B

Reference: Theory of Accounts, C. Valix, 2012, p.832

12. An active market is a market where (choose the incorrect one)

A. The items traded within the market are heterogeneous

B. The items traded within the market are homogeneous
C. Willing buyers and sellers can normally be found at any time
D. Prices are available to the public
Answer: A

Reference: Theory of Accounts, C. Valix, 2012, p.825

13. It is a fall in the market value of an asset so that its recoverable amount is now less that its carrying
amount in the statement of financial position

A. Impairment
B. Depreciation
C. Amortization
D. Decline in use

Answer: A

Reference: Theory of Accounts, C. Valix, 2012, p.824

14. If the assets are to be disposed of

A. The recoverable amount is the fair value less cost of disposal

B. The recoverable amount is the value in use
C. The asset is not impaired
D. The recoverable amount is the carrying value

Answer: A

Reference: Theory of Accounts, C. Valix, 2012, p.830

15. Which if the following terms best describes the higher of fair value less cost of disposal and value in
use?

A. Recoverable amount
B. Revalued amount
C. Depreciable amount
D. Carrying amount

Answer: A

Reference: Theory of Accounts, C. Valix, 2012, p.831

16. Which of the following is incorrect?

A. If an item of property, plant and equipment is revalued, the entire class property, plant and
equipment to which that asset belongs shall be revalued
B. The depreciation method use shall reflect the pattern in which the asset’s future economic
benefits are expected to be consumed by the entity
C. The carrying amount of an item of property, plant and equipment shall be derecognized on
disposal or when no future economic benefits are expected from its use or disposal
D. Recoverable amount is the lower of an asset’s net selling price and it value in use
Answer: D

Reference: Intermediate Accounting, P. Empleo, 2010, p.358

17. If an asset’s carrying value is decreased as a result of a revaluation, the decrease shall be
recognized in profit or loss. However, if there is a revaluation surplus account balance as a result of
prior evaluation, the decrease shall be?

A. Debited directly to equity for the entire amount of decrease

B. Debited directly to revaluation surplus to the extent of its balance and any remainder of the
decrease is debited to retained earnings
C. Debited directly to equity to the extent of the balance of revaluation surplus and any remainder of
the decrease is recognized in profit or loss
D. Ignored

Answer: C

Reference: Intermediate Accounting, P. Empleo, 2010, p.359

 MULTIPLE CHOICE – PROBLEM SOLVING

Problem I
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 the 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. 1,500,000
B. 2,000,000
C. 500,000
D. 0

Answer: A

Fair value- higher than value in use ₱ 4,500,000

Carrying amount 6,000,000
Impairment loss ₱ 1,500,000

Reference:
Practical Accounting One Volume 1, 2014 edition, C Valix, p. 669

Problem II
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
Accumulated Depreciation 3,000,000
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. 3,250,000
B. 3,750,000
C. 750,000
D. 250,000
Answer: C.

Cost of equipment ₱ 5,000,000

Less: Accumulated depreciation 3,000,000
Carrying amount 2,000,000
Less: Fair value of equipment 1,250,000
Impairment loss ₱ 750,000

Reference:
Practical Accounting One Volume 1, 2014 edition, C Valix, p. 671

Problem III
Kenya Company acquired a machine on January 1, 2013 for ₱8,000,000. The machine has a 10-year
useful life, a ₱500,000 residual value, and is to be depreciated using the straight line method.
By the end of 2014, the machine was damaged by the 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 ₱7,000,000.
The fair value on December 31, 2014 is ₱6,600,000 while the discounted net future cash flows amount to
₱6,300,000.
What is the depreciation expense that should be recognized for the year ended December 31, 2014?
A. 825,0000
B. 812,5000
C. 750,000
D. 787,500

Answer: B.

Cost-January 1, 2013 ₱ 8,000,000

Less: Accumulated depreciation (8,000,000-500,000/10x2) 1,500,000
Carrying amount- December 31,2014 6,500,000
Divide by the remaining useful life 8
Depreciation for 2015 ₱ 812,500

Reference:
Practical Accounting One Volume 1, 2014 edition, C Valix, p. 671

Problem IV
Lobo Company reported an impairment loss of ₱2,000,000 in 2013. This loss was related to an item of
property, plant and equipment which was acquired on January 1, 2012 with cost of ₱10,000,000, useful
life of 10 years and no residual value. On December 31,2013, the entity reported this asset had increased
to ₱6,000,000 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
₱7,500,000. 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. 2,250,000
B. 1,750,000
C. 1,500,000
D. 0

Answer: B.

Fair value- January 1,2014 ₱ 6,000,000

Less: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

Less:Accumulated depreciation- December 31, 2014
(10,000,000/10x3) 3,000,000
Carrying amount- 12/31/2014-assuming no impairment loss 7,000,000
Less: Carrying amount-12/31/2014-with impairment 5,250,000
Gain reversal of impairment ₱ 1,750,000

Reference:
Practical Accounting One Volume 1, 2014 edition, C Valix, p. 671

Problem V
Mortal Company acquired a machine for 3,200,000 on august 31, 2016
The machine has a 5-year useful life, a 500,000 residual value, and a depreciated using the straight line
method.
On May 31, 2019, attest for recoverability revealed that the expected net future undiscounted cash inflows
related to the continued use and eventual disposal of the machine amount to 1,500,000.
The fair value less cost of disposal of the machine on May 31, 2019 is 1,350,000 with no residual value.
What is the depreciation of the machine for June 2019?
A. 51,000
B. 50,000
C. 45,000
D. 53,000

Answer: B.

Cost ₱ 3,200,000
Less: Accumulated depreciation- 5/31/2019 (3,200,000-500,000x33/60) 1,485,000
Carrying amount-5/31/2019 1,715,000
Less: Fair value less cost of disposal 1,350,000
Impairment loss ₱ 365,000

From August 31, 2016 to May 31,2019 is a period of 33 months. Thus, the remaining life of the machine is
27 months, 60 months original life minus 33.

Depreciation for the month of June 2019

(1,350,000/27 months) ₱ 50,000

Reference:
Intermediate Accounting 2019, Volume 1, C Valix, p.855

Problem VI
Silver Company had an equipment with carrying amount of 450,000 at the year end. The following
information was available at the 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 that should be reported in the income statement for the current year?
A. 50,000
B. 35,000
C. 30,000
D. 22,000

Answer: D.

Carrying amount ₱ 450,000

Fair value, assuming the asset is sold stand-alone 428,000
Impairment loss ₱ 22,000

Reference:
Intermediate Accounting 2019, Volume 1, C Valix, p.858

Problem VII:
On January 1, 2016, Scalawag Company purchased equipment for 5,600,000, the equipment had an 8-
year useful life and residual value of 800,000. The entity depreciated the equipment using the straight line
method.
In August 2019, the entity questioned the recoverability of the carrying amount of the equipment.
On August 31, 2019, the discounted expected net future cash flows related to the continued use and
eventual disposal of the equipment total 3,500,000.
The fair value less cost of disposal of the equipment on such date is 3,000,000
After any loss on impairment has been recognized, what is the carrying amount of the equipment?
A. 3,500,000
B. 3,400,000
C. 3,000,000
D. 2,600,000

Answer: B.

Cost- January 1,2016 ₱ 5,600,000

Less: Accumulated Depreciation-August 31, 2019
(4,800,000/96 monthsx44) 2,200,000
Carrying amount- August 31,2019 ₱ 3,400,000

Useful life (8years x 12 months) 96 months

Value in use 3,500,000

Fair value 3,000,000
Recoverable amount 3,500,000

The recoverable amount of 3,500,000 is higher than the carrying amount of 3,400,000. Therefore. There
is no impairment loss.
The equipment should be reported at the carrying amount of 3,400,000

Reference:
Intermediate Accounting 2019, Volume 1, C Valix, p.858

Problem VIII, IX, X

On January 1, 2019, Elite Company purchased equipment with a cost of 11,000,000, 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:

Fair value less cost of disposal ₱ 8,400,000

Divide by 8
Depreciation ₱ 1,050,000
 Chapter 35- Impairment of Asset
Cash Generating Unit

Definition

A cash generating unit (CGU) 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.

CGU may be a department, product line or a factory for which the output of product and the input of raw
materials, labor and overhead can be identified.

Example:
 Retail store of a fast food chain
 Bookstore of a school
 Convenient store of a gasoline station
 Supermarket of a mall

-These examples generate cash flows that are independent from the cash flows of the entity as a whole. If
these segments are the smallest identifiable group of assets, then they are considered as CGUs.

Concepts

 The recoverable amount of an asset shall be determined for the asset individually. 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 to.

 Assets whose recoverable amount can be determined reliably are tested for impairment
individually.

 Assets whose recoverable amount cannot be determined reliably (e.g., assets that do not generate
their own cash flows) are included in a CGU. The CGU is the one tested for impairment. However,
when management is committed to sell an individual asset belonging to a CGU, that individual asset
is separately tested for impairment.

Measurement/Principles

 Recoverable Amount of CGU: Higher of the CGU’s fair value less cost of disposal and value in use.

Note: Most often, the recoverable amount of a CGU is equal to the value in use because the unit is
not to be disposed of.

 Carrying Amount of CGU

-Includes the carrying amount of only those assets that can be attributed directly or allocated on a
reasonable and consistent basis to the CGU and can generate the future cash inflows used in
determining the value in use of the cash generating unit. (PFRS 36, par. 76).
-It does not include the carrying amount of any recognized liability, unless the recoverable
amount of the CGU cannot be determined without consideration of this liability. (par. 76, PFRS 36).
-The reason is stated in Pas 36, par. 43
o What does it say? To avoid double counting, estimates of future cash flows do not include
cash outflows that relate to obligations that have been recognized as liability by the CGU,
such as payables and provisions.
 Impairment Loss: Compare the carrying amount of the asset with the recoverable amount.
 Note: An impairment loss shall be recognized for a CGU if, and only if, the recoverable amount of
the unit is less than the carrying amount of the unit. (RA < CA)

Impairment Loss recognized for the CGU shall be allocated to the assets of the unit in the following
order:
1. Goodwill, if any.
2. Noncash Assets of the unit prorata based on their carrying amount.

Remember: When allocating the impairment loss, the carrying amount of an asset belonging to the
CGU shall not be reduced below the highest of:

a. Its fair value less costs of disposal (if determinable);

b. Its value in use (if determinable); and
c. Zero.

Any amount that cannot be allocated to an asset because of the limitation above is allocated to the
other assets of the CGU pro rata based on their carrying amounts.

Additional Concepts

 Goodwill does not generate cash flows independently from other assets or groups of assets, and
therefore, the recoverable amount of goodwill as an individual asset cannot be determined.
Consequently, the recoverable amount is determined for the CGU to which goodwill belongs, if
there is an indication that goodwill may be impaired.

 A CGU 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.

Note: (RA < CA)

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.

 There is no reversal of impairment loss on goodwill.

 Corporate assets are assets that contribute to the future cash flows of several departments or
divisions within an entity.

E.g. Electronic Data Processing equipment

Head office building
Research center

 Corporate assets do not generate cash inflows independently.

 To test a corporate asset for impairment, it needs to be allocated to the various CGUs using that
asset-quite similar to goodwill.

Illustrations/Application

I. Impairment of CGU-without goodwill

An entity has determined that one of its cash generating units is impaired.

The assets of the cash generating unit at carrying amount are:

Building 2,400,000
Land 1,800,000
Equipment 1,500,000
Inventory 300,000
Carrying amount of CGU 6,000,000

The entity calculated the value in use of the cash generating unit to be Php 4,500,000.

Computation of Impairment Loss

Compare carrying amount with recoverable amount.

Carrying amount of CGU 6,000,000

Value in use 4,500,000
Impairment loss 1,500,000 Allocation of impairment Loss

Since there is no goodwill, the impairment

loss is allocated
across the assets based on carrying amount- Pro rata allocation.

Carrying Amount Fraction Loss

Building 2,400,000 24/60 600,000
Land 1,800,000 18/60 450,000
Equipment 1,500,000 15/60 375,000
Inventory 300,000 3/60 75,000
6,000,000 1,500,000

Journal Entry to record Impairment Loss :

Impairment loss 1,500,000

Accumulated Depreciation-building 600,000
Land 450,000
Accumulated Depreciation-equipment 375,000
Inventory 75,000

Remember to apply the concepts and guidelines for measurement!

II. Fair value less cost of disposal of one of the assets determinable

An entity has determined that its fine china division is a cash generating unit. The entity calculated the
value in use of the division to be Php 8,000,000.

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
Carrying amount of CGU 10,000,000

The entity has also determined that the fair value less cost of disposal of the building is
Php 4,500,000.

Carrying amount of CGU 10,000,000

Value in use 8,000,000
Impairment loss 2,000,000

Allocation based on carrying amount

Building (5/10 x 2,000,000) 1,000,000

Equipment (3/10 x 2,000,000) 600,000
Inventory (2/10 x 2,000,000) 400,000
Total impairment loss 2,000,000

Observe that after allocating the Php 1,000,000 loss to the building, the carrying amount of the building
would be Php 4,000,000 which is lower than the fair value less cost of disposal of Php 4,500,000.

Take note that the carrying amount of an asset shall not be reduced below the highest of fair value less
cost of disposal. The amount of impairment loss that would otherwise have been allocated to the asset
shall be allocated prorata to the other assets of the CGU.

Accordingly, only Php 500,000 loss is allocated to the building and balance of Php 500,000 is reallocated
to the equipment and inventory prorata.

Remember to apply the principle on the allocation of impairment loss!

Building Equipment Inventory

Allocated loss 1,000,000 600,000 400,000
Reallocated loss (500,000)
3/5 x 500,000 300,000
2/5 x 500,000 200,000
Impairment loss 500,000 900,000 600,000

Journal Entry to record Impairment Loss

Impairment loss 2,000,000

Accumulated Depreciation-building 500,000
Accumulated Depreciation-equipment 900,000
Inventory 400,000

After the adjustment, the carrying amount of the building is Php 4,500,000 which is equal to its fair value
less cost of disposal.

III. Impairment of CGU-with goodwill

The assets of a cash generating unit at carrying amount at year-end are as follows:

Property, plant and equipment 3,000,000

 Patent 2,000,000
Goodwill 1,000,000
Carrying amount of CGU 6,000,000

An annual impairment review is required as the cash generating unit contains goodwill.

The most recent review assesses the value in use of the cash generating unit to be Php 4,500,000.

Carrying amount of CGU 6,000,000

Value in use 4,500,000
Impairment loss 1,500,000

Allocation of impairment loss

Allocate first the impairment loss to goodwill and then the excess to the noncash assets prorata based on
carrying amount.

Take note of the order of priority!

Impairment loss 1,500,000

Applicable to goodwill 1,000,000
Excess impairment loss 500,000

Carrying Fraction Loss

Amount

Property, plant and equipment 3,000,000 3/5 300,000

Patent 2,000,000 2/5 200,000
5,000,000 500,000
Journal Entry to record impairment loss

Impairment loss 1,500,000

Goodwill 1,000,000
Accumulated Depreciation-PPE 300,000
Patent 200,000

IV. CGU with assets and liabilities

An entity has a cash generating unit that has been experiencing significant losses in prior years. There is
objective indication that such cash generating unit is impaired.

At current year-end, the cash generating unit is tested for impairment with the following assets and
liabilities:

Cash 1,000,000
Accounts receivable 2,000,000
Inventory 3,000,000
Land 1,500,000
Plant and equipment 6,500,000
Accumulated depreciation 3,000,000
Goodwill 1,000,000
Accounts payable 2,500,000
Accrued liabilities 500,000
It is reliably determined that the value in use of the cash generating unit is Php 8,000,000.

Allocation of impairment loss

Cash 1,000,000
Accounts receivable 2,000,000
Inventory 3,000,000
Land 1,500,000
Plant and equipment 6,500,000
Accumulated depreciation (3,000,000)
Goodwill 1,000,000
Carrying amount of CGU 12,000,000
Value in use 8,000,000
Impairment loss 4,000,000
Applicable to goodwill 1,000,000
Applicable to noncash assets 3,000,000

The remaining impairment loss of Php 3,000,000 is allocated to other noncash assets based on carrying
amount:

CA Fraction Loss
A/R. 2,000,000 20/100 600,000
Inv. 3,000,000 30/100 900,000
Land 1,500,000 15/100 450,000
P&E-net 3,500,000 35/100 1,050,000
10,000,000 3,000,000

Journal entry to record impairment loss

Impairment loss 4,000,000

Goodwill 1,000,000
Accounts receivable 600,000
Inventory 900,000
Land 450,000
Accumulated depreciation-PPE 1,050,000

Observe that the liabilities of the CGU are ignored in determining the carrying amount of the CGU.

Take note that only the carrying amount of those assets directly attributable to the CGU are included in
the computation of the CGU’s carrying amount. The carrying amount of any recognized liability is not
included, unless the CGU’s recoverable amount cannot be determined without consideration of this
liability.

V. CGU Impairment: corporate assets

An entity has two cash generating units, CGU one and CGU Two. There is no goodwill allocated to the
cash generating units. The carrying amounts of the cash generating units are:

CGU One 10,000,000

CGU Two 15,000,000
The entity has an office building that has not been included in the carrying amounts of the cash
generating units and can be allocated to the units on the basis of carrying amount. The office building has
a carrying amount of Php 5,000,000.

The entity calculated the value in use of the cash generating units as follows:

CGU One 9,000,000

CGU Two 19,000,000

The carrying amounts of the units including an allocated portion of the office building are determined as
follows:

CGU One CGU Two

Carrying amount 10,000,000 15,000,000
Office building:
10/25 x 5,000,000 2,000,000
15/25 x 5,000,000 3,000,000
Total CA 12,000,000 18,000,000
Value in use 9,000,000 19,000,000
Impairment loss 3,000,000 -

CGU Two is not impaired because the value in use is higher than the carrying amount. The impairment
loss on CGU One is allocated as follows:

Carrying Amount Fraction Loss

Other Assets 10,000,000 10/12 2,500,000

Office Building 2,000,000 2/12 500,000
12,000,000 3,000,000

Journal entry to record impairment loss

Impairment loss 3,000,000

CGU #1’s other assets 2,500,000
Corporate Asset-office building 500,000

Summary

 If an asset’s recoverable amount can be determined reliably, it is tested for

impairment on its own. If its recoverable amount cannot be determined reliably,
the CGU to which that asset belongs is the one tested for impairment.

 For purposes of impairment, goodwill and corporate assets are allocated to CGUs.

 The impairment loss on a CGU is allocated first to any goodwill in the CGU. The
excess is allocated to the other assets of the CGU prorata based on their carrying
amount.
 MULTIPLE CHOICE - THEORIES

1. 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

B. Goodwill
C. Corporate Asset
D. The entity as a whole

Answer: A.

Reference: Theory of Accounts, C. Valix, 2012, p.826

2. 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
B. Property, plant and equipment
C. Group
D. Cash generating unit

Answer: A

Reference: Theory of Accounts, C. Valix, 2012, p.828

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

A. Corporate assets are group or divisional assets such as head office building, EDP, equipment or
a research center.
 B. Essentially, corporate assets generate cash inflows independently from other assets.
C. The recoverable amount of an individual corporate asset cannot be determined unless
management has decided to dispose of the asset.
D. 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.

Answer: B

Reference: Theory of Accounts, C. Valix, 2012, p.828

4. When impairment testing a cash generating unit, any corporate assets shall

A. Be allocated on a reasonable and consistent basis.

B. Be separately impairment tested.
C. Be included in the head office assets or parent’s assets and impairment tested along with that
cash generating unit.
D. Not be allocated to cash generating units.

Answer: A

Reference: Theory of Accounts, C. Valix, 2012, p.829

5. 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
B. II only
C. Both I and II
D. Neither I nor II

Answer: C

Reference: Theory of Accounts, C. Valix, 2012, p.832

6. Which of the following statements is incorrect?

A. Goodwill arising from business combination can only be tested for impairment in conjunction with
the cash generating unit to which the goodwill is allocated.
B. Impairment loss recognized on goodwill shall never be reversed.
 C. The impairment loss on a cash generating unit (CGU) is allocated to goodwill and the other
assets belonging to the CGU on a prorata basis.
D. Impairment losses on goodwill are never recognized in other comprehensive income.

Answer: D

Reference: Intermediate Accounting I-B, Z. Millan, 2019, p.526

7. Which of the following impairments should never be reversed?

A. Impairment loss on goodwill

B. Impairment loss on a machinery measured under the revaluation model
C. Impairment loss on an investment property measured under the fair value model
D. Impairment loss on an investment property measured under the cost model

Answer: A

Reference: Intermediate Accounting I-B, Z. Millan, 2019, p.533

8. What is the allocation of an impairment loss recognized for a cash generating unit?

A. Across the assets of the unit based on carrying amount.

B. Across the assets of the unit based on fair value.
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.

Answer: D
Reference: Conceptual Framework and Accounting Standards, C. Valix et al, 2018, p.496

9. If the recoverable amount of an individual asset cannot be estimated, the impairment test is instead
applied to:

A. The share price of the entity.

B. The cash reserves of the entity.
C. The cash generating unit to which the asset belongs.
D. The fair value of all other assets of the entity.

Answer: C

Reference: Australian Accounting Standards, R. Picker, 2006, sec. 13.4

10. The impairment test for goodwill must be conducted:

 A. Annually, at the same time every year.
B. Annually, at the end of the reporting period.
C. Once every three years at the end of reporting period.
D. Only if it is reasonable to expect that goodwill has been impaired.

Answer: A

Reference: Australian Accounting Standards, R. Picker, 2006, sec. 13.5

11. The recoverable amount of a cash generating unit is

A. The selling price lest cost to sell.

B. The discounted cash flow from the use and disposal of the unit.
C. The higher between the selling price less cost to sell and the discounted cash flow from the use
and disposal of the unit.
D. The lower between the selling price less cost to sell and the discounted cash flow from the use
and disposal of the unit.

Answer: C

Reference: Intermediate Accounting, P. Empleo, 2010, p.360

 MULTIPLE CHOICE – PROBLEMS
Problem I
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 ₱2,700,000. What are the
revised carrying amounts of the goodwill and machinery, respectively?
A. 500,000 and 2,200,000
B. 900,000 and 1,800,000
C. 1,100,000 and 1,600,000
D. 800,000 and 1,900,000

Answer: A.

Carrying amount of cash generating unit ₱ 3,300,000

Value in use 2,700,000
Impairment loss ₱ 600,000

The impairment loss is applied against the goodwill only.

Thus, goodwill has an adjusted balance of ₱500,000 and the balance of the machinery remains the same
at ₱2,200,000.

Reference:
Practical Accounting One Volume 1, 2014 edition, C Valix, p. 688

Problem II
Uranus Company has various cash generating uniits. 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

As part of the impairment testing procedure, the management determined the value in use of the cash
generating unit at ₱8,500,000. 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. 3,500,000
B. 4,500,000
C. 2,625,000
D. 3,375,000

Answer: C.

Carrying amount of CGU ₱ 13,000,000

Value in use 8,500,000
Impairment loss 4,500,000
Impairment loss allocated to goodwill 1,000,000
Remaining impairment loss ₱ 3,500,000

Carrying Amount Fraction Loss

Land 2,500,000 25/100 875,000
Plant and property 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.

Reference:
Practical Accounting One Volume 1, 2014 edition, C Valix, p. 694

Problem III
On July 1, 2014, Nicole Company acquired Jones Company in a business combination. As a result of the
combination, the following amounts of the 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, anew 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 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. 100,000
B. 250,000
C. 150,000
D. 0

Answer: 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.

Reference:
Practical Accounting One Volume 1, 2014 edition, C Valix, p. 695
Problem IV
Divine Company is testing two reporting units for impairment of goodwill. Information about results os
such tests are shown below.
Telecommunications 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?
A. 200,000
B. 900,000
C. 500,000
D. 0

Answer: C.

Telecommunication
Segment carrying amount including goodwill ₱ 2,500,000
Estimated total fair value of segment 2,900,000
Impairment loss -

The carrying amount of goodwill of ₱ 500,000 is not affected because the Telecommunication reporting
unit is not impaired.

Netwoking
Segment carrying amount including goodwill ₱ 3,000,000
Less: Estimated total fair value of segment 2,800,000
Impairment loss- all allocated to goodwill ₱ 200,000

Goodwil ₱ 500,000
Impairment loss 200,000
Carrying smount of goodwill ₱ 300,000

Reference:
Intermediate Accounting 2019, Volume 1, C Valix, p.875

Problem V
Zephyr Company provided the following calculation about an impairment loss recognized on December
31, 2019:

Goodwill Other assets

₱
Carrying amount ₱ 3,000,000 9,000,000
Less:Impairment loss 3,000,000 2,000,000
₱
Adjusted carrying amount ₱ - 7,000,000

There has been a favorable change in the estimate of recoverable amount of the net asset since the
impairment loss was recognized. The recoverable amount is now 8,000,000 on December 31, 2020.
The carrying amount of the net assets of would has been 7,200,000 on December 31, 2020 if there was
no impairment loss recognized on December 31, 2019. Assets are depreciated at 20% of reducing
balance.
What amount should be recognized as gain on reversal of impairment for 2020?
A. 1,000,000
B. 2,400,000
C. 1,600,000
D. 0

Answer: C.

Carrying amount- 12/31/2019 ₱ 7,000,000

Less: Depreciation for 2020 (20%) 1,400,000
Carrying amount- 12/31/2020 5,600,000
Carrying amount- 12/31/2020(assuming no impairment) 7,200,000
Reversal of impairment loss ₱ 1,600,000

Reference:
Intermediate Accounting 2019, Volume 1, C Valix, p.875

Problem VI
At the beginning of the current year, Jazz 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 traing
because of the aggressive marketing of the computer-based toys.
The management measured the value in use of the toy train division of the current year-end at 3,600,000.
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
Determine the amount of impairment loss

Answer: ₱1,400,000

Total carrying amount ₱ 5,000,000

Value in use 3,600,000
Impairment loss ₱ 1,400,000

Reference:
Intermediate Accounting 2019, Volume 1, C Valix, p.870

Problem VII,VIII
Palpable Company has determined that the furniture division is a cash generating unit. The entity
calculated the value in use of the division to be 11,000,000.
The entity has also determined that the fair value less cost of disposal of the building is 6,500,000. The
carrying amount of the assets are:
Building 8,000,000
Equipment 4,000,000
Inventory 4,000,000
1. Determine the impairment loss.

Carrying amount ₱ 16,000,000

Value in use 11,000,000
Impairment loss ₱ 5,000,000

2. Allocate the impairment loss to the assets of the cash generating unit

Allocation of impairment loss

Building (8/16x5,000,000) ₱ 2,500,000
Equipment (4/16x5,000,000) 1,250,000

Inventory (4/16 x 5,000,000) 1,250,000

₱ 5,000,000

Observe that after allocating the 2,500,000 loss to the building, the carrying amount of the building would
be 5,500,000 which is lower than its fair value of 6,500,000.
Accordingly, only 1,500,000 loss is allocated to the building and the balance of 1,000,000 is reallocated to
the equipment and inventory prorate.

Building Equipment Inventory

Allocated loss ₱ 2,500,000 ₱ 1,250,000 ₱ 1,250,000
Less: Reallocated loss 1,000,000
(4/8x1,000,000) 500,000
(4/8x1,000,000)     500,000
Impairment loss ₱ 1,500,000 ₱ 1,750,000 ₱ 1,750,000

Reference:
Intermediate Accounting 2019, Volume 1, C Valix, p.870

Problem IX,X
One of the cash generating units of Severe Company is the production of liquor.
At the year-end, the entity believed that the assets of the cash generating unit are impaired based on the
analysis of the economic indicators.
The assets and liabilities of cash generating unit at carrying amount at year-end 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
Accumulated depreciation 4,000,000
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 is 30,000,000.
The accounts receivable are considered doubtful.

1. Determine the carrying amount of the cash generating unit.

Answer: ₱37,000,000

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

2. Prepare journal entry to record the impairment loss.

7,000,00
Impairment loss 0
3,000,00
Goodwill 0
1,120,00
Inventory (7/25x 4,000,000) 0
2,880,00
Property, plant and equipment (18/25x 4,000,000) 0

No impairment loss is allocated to the accounts receivable because the accounts considered collectible
except those doubtful.
Reference:
Intermediate Accounting 2019, Volume 1, C Valix, p.872