QUIZ 1: Impairment

1. Under IAS 36, which of the following statements is correct?

I. An entity shall assess at the end of each reporting period whether there is an indication that an asset may
be impaired and if any indication exists, the entity shall estimate recoverable amount of the asset.
II. Irrespective of whether there is an indication of impairment, an entity shall test an intangible asset with
indefinite useful life or intangible asset not yet available for use, or goodwill acquired in business
combination for impairment annually.
a. I only b. Both I and II c. II only d. Neither I nor II

2. Which of the following statements best describes the term “impairment loss?
a. The removal of an asset from an entity’s statement of financial position.
b. The amount by which the carrying amount of an asset exceeds its recoverable amount.
c. The systematic allocation of an asset’s cost less residual value over its useful life.
d. The amount by which the recoverable amount of an asset exceeds its carrying amount.

3. A cash generating unit (CGU) is the smallest identifiable group of assets that generate cash inflows from
continuing use that are largely independent of cash inflows form other assets or group of assets. In testing
impairment of a CGU, the "bottom up" test is used. This means that
I. Goodwill can be allocated to the CGU and an impairment has occurred if the recoverable amount of
the CGU is less than its carrying amount plus the allocated goodwill.
II. Goodwill can be allocated to the CGU and an impairment has occurred if the recoverable amount of
the CGU is less than its carrying amount excluding the goodwill.
a. I only b. II only c. Both I and II d. Neither I nor II

4. The estimates of future cash flows in calculating value in use include all of the following, except
a. Future cash flows for capital expenditure that will improve the asset
b. Cash inflows from the use of the asset
c. Cash outflows incurred to generate cash inflows from the use of the asset
d. Net cash flows from the disposal of the asset

5. The following statements pertain to recognition and measurement of an impairment loss. Which statement is
incorrect?
a. An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable
amount.
b. After the recognition of an impairment loss, depreciation of the asset for the future periods should be
equal to the revised carrying amount less its residual value allocated on a systematic basis over its original
life.
c. An impairment loss should be recognized as expense in the income statement immediately.
d. If the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset
should be reduced to its recoverable amount.

Use the following information for the next three items:

One of Boruto Corporation's cash-generating units is associated with the manufacture of wine barrels. At 31
December 2023, Boruto Corporation believed, based on an analysis of economic indicators, that the assets of
the unit were impaired.

The carrying amounts. the assets of the unit at 31 December 2023 were:
Buildings P420,000
Accumulated depreciation - buildings
(Depreciated at P60,000 per annum) (180,000)
Factory machinery 220,000
Accumulated depreciation - machinery
(Depreciated at P45,000 per annum) (40,000)
Goodwill 15,000
Inventory 80,000
Receivables 40,000
Allowance for doubtful debts (5,000)
Cash 20,000
Boruto Corporation determined the value in use of the unit to be, P535,000. The receivables were considered to
be collectible, except those considered doubtful. During 2024, Boruto Corporation increased the depreciation
charge on buildings to P65,000 per annum, and to P50,000 per annum for factory machinery. The inventory on
hand at 31 December 2023 was also considered impaired and this was sold by the end of 2024. At 31 December
2024, Boruto Corporation, due to a return in the market to the use of traditional barrels for wines and
An increase in wine production, assessed the recoverable amount of the cash-generating to be P20,000 greater
than the carrying amount of the unit.

6. How much is the carrying amount of factory machinery at 31 December 2023 after allocating impairment
loss?
 a. P171,430 b. P172,800 c. P173,270 d. P173,510

7. How much is the carrying amount of buildings at 31 December 2024 after the reversal of impairment loss?
a. P176,878 b. P180,000 c. P165,400 d. P178,6'78

8. How much is the carrying amount of factory machinery at 31 December 2024 after the reversal of impairment
loss?
a. P135,000 b. P131,793 c. P131,322 d. P123,271

9. Uzumaki Company reported an impairment loss of P2,100,000 in its income statement for 2023. This loss was
related an equipment that was acquired on January 1, 2022, for P10,000,000. It was depreciated under the
straight-line method with a useful life of 10 years and no residual value. On December 31, 2023, Uzumaki
reported this asset at P6,000,000 which is the fair value on such date. On December 31, 2024, Uzumaki
determined that the fair value of its impaired asset had increased to P7,500,000.
a. 2,250,000 b. 1,750,000 c. 1,500,000 d. 0

In 2023, Kushina Company determined that there had been a significant decrease in the value of its equipment.
At December 31, 2023, Kushina Company complied the following information.
Original cost of the equipment 6,000,000
Accumulated depreciation 4,200,000
Expected undiscounted value of the future cash inflows
related to the continued use and eventual disposal of the
equipment 1,500,000
Fair value of the equipment 1,300,000

10. The amount of impairment loss in the state profit or loss is

a. 300,000 b. 400,000 c. 500,000 d. 600,000

Kurama Company purchased equipment for P2,800,000 on January 1, 2020. The equipment had an 8-year life
and residual value of P400,000. Kurama depreciated the equipment. In August 2023, Kurama questioned the
recoverability of the carrying amount of this equipment. On August 31, 2023, the discontinued expected net
future cash inflows related to the continued use and eventual disposal of the equipment amounted to P1,600,000.
The equipment’s fair value on August 31, 2023 P15,000.00.

11. After impairment, the carrying amount of the equipment is

a. 1,600,000 b. 1,700,000 c. 1,500,000 d. 1,300,000

Fox Company developed a new machine that reduces the time required to insert the fortune into its fortune
cookies. Because the process is considered very valuable to the fortune cookie industry, Fox Company patented
the machine:

Research and development laboratory expenses 500,000

Metal used in the construction of the machine 160,000
Blueprint used to design the machine 60,000
Wages paid for the employees’ work on the research and
development, building of the machine (60% of the time
was spent in actually building the machine) 600,000
Expense of drawing required by the patent office to
be submitted with the patent application 30,000
Fee paid to government patent office to process application 50,000

At year-end Fox Company paid P350,000 in legal fees to successfully defend the patent against an infringement
suit by another entity.
12. The total amount of expenditures that should be capitalized as the cost of the patent is
a. 320,000 b. 380,000 c. 580,000 d. 900,000

On January 1, 2023, Lava Company purchased a patent for a new consumer product for P900,000. At the time
of purchase, the patent was valid for 15 years. However, the patent’s useful life was estimated to be only 10 years
due to the competitive nature of the product. On December 31, 2026, the product was permanently withdrawn
from sale under government order because of a potential health hazard in the product.
13. The amount that Lava Company charges against income in 2026 if amortization is recorded at the end of
the year.
a. 90,000 b. 540,000 c. 630,000 d. 720,000

Use the following information for the next two items:

On January 1, 2022, Jiraiya Company purchased a patent with a cost P2,320,000, a useful life of 5 years. The
Company uses straight-line depreciation. At December 31, 2023, the company determined that impairment
indicators are present. The fair value less costs to sell the patent is estimated to be P1,080,000. The patent’s value-
in-use is estimated to be P1,130,000. The asset’s remaining useful life is estimated to be 2 years.
14. Jiraiya’s 2023 income statement will report Loss on Impairment of
a. 0 b. 262,000 c. 312,000 d. 1,190,000

15. The amortization expense of the patent for 2024 is

a. 360,000 b. 377,000 c. 540,000 d. 565,000

On December 31, 2023, Naruto Company subjected its production equipment to impairment assessment. This
equipment was acquired last January 1, 2020 for the following data were compiled: p12,000,000 and had a
useful life of ten years. In connection with the assessment,
Fair value P4,000,000
Estimated costs of disposal 600,000
Annual net cash inflows for the asset's remaining useful life 800,000
Estimated salvage value of the asset at the end of useful life 500,000
Relevant discount rate 9%
Round-off present value factors into two decimal places.
16. The amount of impairment loss on December 31, 2023 shall be
a. P3,308,000 b. P3,608,000 c. P3,800,000 d. P4,108,000

Use the following information for the next two items:

On January 1, 2020, Gamabunta Company constructed its office building for a total cost of P16,000,000 with
estimated useful life of 20 years. Fast forward to December 31, 2023, this asset was subjected for impairment with
FVLCD and value in use amounting to P11,200,000 and P10,400,000, respectively. After few years on December
31, 2027, there were indicators that the asset is further impaired. As of that date, the asset's FVLCD and value in
use amounted to P6,880,000 and P7,440,000, respectively.
17. The amount of impairment loss on December 31, 2023 shall be
a. P2,150,000 b. P1,750,000 c. P1,600,000 d. P2,400,000

18. The amount of impairment loss on December 31, 2027 shall be

a. P870,000 b. P960,000 c. P1,360,000 d. P1,520,000

Use the following information for the next two items:

On December 31, 2021, Gamakichi Company assessed its transportation vehicle for impairment. As of the same
date, the vehicle's value in use and FVLCD amounted to P3,500,000 and P3,200,000, respectively. The vehicle was
acquired last january 1, 2019 for P7,000,000 and had an estimated useful life of ten years. After two years, on
December 31, 2023, there were indicators that the previous impairment may be reversed. The Company has a
policy of applying the cost model on its vehicles. If, as of December 31, 2023, the vehicle's value in use and
FVLCD amounted to P2,800,000 and P3,000,000, respectively,

19. the amount of impairment reversal to be recognized in profit or loss shall be

a. P300,000 b. P500,000 c. P1,000,000 d. P1,250,000

20. If, as of December 31, 2023, the vehicle's value in use and FVLCD amounted to P4,200,000 and P3,900,000,
respectively, the amount of impairment reversal to be recognized in profit or loss shall be
a. P900.000 b. P1,400,000 c. P1,000,000 d. P1,700,000

Use the following information for the next two items:

At the beginning of the year 2016, Naruto Company constructed its building for a total cost of P13,500,000. Useful
life was estimated to be 30 years. The Company applies the revaluation model for all of its buildings. The building
was impaired on December 31, 2019 when its FVLCD and value in use amounting to P7,800,000 and P7,350,000,
respectively. Fast forward to December 31, 2023, there were indicators that the previous impairment may
reversed. As of the same date, the building's FVLCD and value in use amounted to P10,780,000 and P11,220,000,
respectively.
21. The amount of impairment reversal to be recognized in profit or loss shall be
a. P2,900,000 b. P3,300,000 c. P1,720,000 d. P1,320,000

22. The amount of impairment reversal to be recognized in other comprehensive income shall be
a. P2,900,000 b. P3,300,000 c. P1,720,000 d. P1,320,000

Use the following information for the next three items:

On December 31, 2023, one of Sasuke Company's CGUs may be impaired. This CGU had the following
components:
Building P8,000,000
Land 5,000,000
Equipment 3,500,000
Trademark 2,500,000
Goodwill 1,000,000
Relevant FVLCD and value in use of this CGU were P13,300,000 and P12,600,000, respectively.

23. The amount of impairment loss to be allocated to building shall be a.

 a. P2,400,000 b. P2,680,000 c. P2,720,000 d. P3,000,000

24. The carrying amount of the equipment after the impairment allocation shall be
a. P2,150,000 b. P2,350,000 c. P2,450,000 d. P2,650,000

25. The carrying amount of the trademark after the impairment allocation shall be
a. P1,680,000 b. P1,750,000 c. P1,327,500 d. P1,162,500

Use the following information for the next four items:

At the end of 2023, Tsunade Company's factory building with carrying amount of P7,000,000 appeared to be
impaired based on the impairment indicators. Consequently, the Company estimated its FVLCD as P6,825,000.
However, its value in use cannot be estimated since the asset cannot generate cash inflows on its own.
following components:
As a result, the CGU to which the factory building belongs was identified with the
Goodwill P3,000,000
Accounts receivable 1,200,000
Inventory 2,800,000
Land - revaluation model 6,000,000
Investment in equity securities – FVTPL 1,000,000
Factory building 7,000,000
Machinery 4,000,000
Factory fixtures 5,000,000
Patents (FVLCD of P4,500,000) 6,500,000
Transportation vehicle 3,500,000
This CGU had FVLCD and value in use amounting to P32,000,000 and P33,000,000, respectively.

26. The total amount of impairment loss to be allocated to land shall be

a. PO b. P750,000 c. P918,000 d. P1,238,000

27. The total amount of impairment loss to be allocated to inventory shall be

a. PO b. P280,000 c. P570,000 d. P630,000

28. The carrying amount of the patent after the impairment allocation shall be
a. P5,687,500 b. P5,505,500 c. P5,245,500 d. P5,323,500

29. The carrying amount of the machinery after the impairment allocation shall be a.
a. P3,178,000 b. P3,300,000 c. P3,500,000 d. P3,388,000

30. On January 1, 2019, Sarada purchased equipment with a cost of 4,668,000 a useful life of 12 years and no
salvage value. The company uses straight-line depreciation. At December 31, 2019, the company determines
that impairment indicators are present. The fair value less cost to sell the asset is estimated to be Hk$4,620,000.
The asset's value-in-use is estimated to be 4,305,000. There is no change in the asset’s useful life or salvage
value. The 2019 income statement will report Loss on Impairment of
a. 0. b. 26,000. c. 48,000. d. 341,000.

END