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CHAPTER 61
IMPAIRMENT OF ASSET
Individual asset Problem 61-1 (AICPA Adapted) At year-end, Zee Company has an equipment with the following cost and accumulated depreciation: Equipment 9,000, Accumulated depreciation 3,000, Due to obsolescence and physical damage, the equipment is found to be impaired. At year-end, the entity has determined the following information related to the equipment: Fair value less cost of disposal 4,500, Value in use or discounted net cash inflows 4,000, Undiscounted net cash inflows 5,500, What amount should be reported as impairment loss for the year? a. 1,500, b. 2,000, c. 500, d. 0 Solution 61-1 Answer a Fair value โ higher than value in use 4,500, Carrying amount 6,000, Impairment loss (1,500,000) If the recoverable amount of an asset is lower than the carrying amount, the difference is recognized as an impairment loss. The undiscounted net cash inflows are ignored in determining the recoverable amount. The recoverable amount is equal to the value in use or fair value less cost of disposal, whichever is higher. Impairment loss 1,500, Accumulated depreciation 1,500, Problem 61-2 (AICPA Adapted) Jacqueline Company had an equipment with carrying amount of P4,500,000 at year-end: Expected discounted net cash flows 4,000, Fair value of similar asset 4,150,
Fair value of the asset when sold stand-alone 4,280, What is the impairment loss for the current year? a. 500, b. 350, c. 220, d. 0 Solution 61-2 Answer c Carrying amount 4,500, Recoverable amount equal to fair value assuming asset is sold stand-alone which is higher than discounted net cash flows 4,280, Impairment loss 220, Problem 61-3 (AICPA Adapted) Ball Company determined as result of a plant rearrangement that there had been a significant change in the manner in which a machinery was going to be used in manufacturing process. Expected future cash inflows from use of the machinery 3,500, Expected future cash outflows from use of the machinery 750, Expected future cash proceeds from sale of the machinery at the disposal date 500, For purposes of determining an impairment, what is the amount of expected future cash flows that would be used for the machinery? a. 4,000, b. 3,250, c. 3,500, d. 2,750, Solution 61-3 Answer b Cash inflows from use of machinery 3,500, Cash outflows from use of machinery (750,000) Cash proceeds from sale of machinery 500, Net cash inflows 3,250, Problem 61-4 (AICPA Adapted) Listless Company acquired equipment on January 1, 2017 for P5,000,000. The equipment had a 10-year useful life and no residual value. On December 31, 2018, the following information was obtained:
Problem 61-6 (IAA) Zambia Company purchased four convenience store buildings on January 1, 2012 for a total of P25,000,000. The buildings have been depreciated using the straight-line method with a 20-year useful life and 10% residual value. On January 1, 2018, the entity has converted the buildings into a hotel and restaurant. Because of the change in the use of the buildings, the entity is evaluating the buildings for possible impairment. The entity estimated that the buildings have a remaining useful life of 10 years, that their residual value will be zero, that undiscounted net cash inflows from the buildings will total P1,500,000 per year, and that the current fair value of the four buildings totals P10,000,000. The appropriate discount rate is 12%. The present value of an ordinary annuity of 1 at 12% for 10 periods is 5.65.
- What amount of impairment loss should be recognized for 2018? a. 8,250, b. 9,775, c. 7,500, d. 0 What amount should be recorded as depreciation for 2018? a. 1,000, b. 900, c. 847, d. 762, Solution 61- Question 1 Answer a Fair value 10,000, Present value of net cash inflows (1,500,000 x 5.65) 8,475, Buildings 25,000, Accumulated depreciation (22,500,000/20 x 6) 6,750, Carrying amount โ January 1, 2018 18,250, Fair value โ higher than value in use 10,000, Impairment loss 8,250, Question 2 Answer a Depreciation for 2018 (10,000,000 / 10) 1,000,
Problem 61-7 (IAA) At year-end Visayas Company showed the following intangible assets: Trademark 6,000, Patent 3,000, The trademark has 8 years remaining in the legal life. However, it is anticipated that the trademark will be routinely renewed in the future. Thus, the trademark is considered to have an indefinite life. Because of an inflationary economy, the trademark is expected to generate cash flows of P200,000 per year. The appropriate discount rate is 10%. Mathematically, the discounted value of a stream of indefinite annual cash flows is simply computed by dividing the annual cash flow by the discount rate. The patent has a remaining economic life of 5 years. It is expected that the patent will generate cash flows of P500,000 per year. The appropriate discount rate is also 10%. The present value of an ordinary annuity of 1 at 10% for 5 periods is 3.79. What total amount should be recognized as impairment loss for the year? a. 1,105, b. 5,105, c. 4,000, d. 0 Solution 61-7 Answer b Trademark 6,000, Present value of indefinite cash flows (200,000/10%) 2,000, Impairment loss 4,000, Patent 3,000, Present value of cash flows (500,000 x 3.79) 1,895, Impairment loss 1,105, Total impairment loss (4,000,000+ 1,105,000) 5,105, Problem 61-8 (AICPA Adapted) On January 1, 2016, Reed Company purchased a machine for P8,000,000 and established an annual depreciation charge of P1,000,000 over an eight-year life.
c. 6,000, d. 7,000, Solution 61-9 Answer d Cost 9,000, Accumulated depreciation - January 1, 2018 4,200, Carrying amount - January 1, 2018 4,800, Expected recoverable amount 3,000, Impairment loss 1,800, Journal entry Impairment loss 1,800, Accumulated depreciation 1,800, Accumulated depreciation โ January 1, 2018 4,200, Credit adjustment 1,800, Adjusted accumulated depreciation - January 1, 2018 6,000, Depreciation for 2018 (3,000,000/3) 1,000, Accumulated depreciation - December 31, 2018 7,000, Problem 61-10 (AICPA Adapted) In January 2017, Winn Company purchased equipment at a cost of P5,000,000. The equipment had an estimated residual value of P1.000.000, an estimated 8-year useful life, and was being depreciated by the straight line method. Two years later, it became apparent that this equipment suffered a permanent impairment of value. In January 2019, management determined the carrying amount should be only P1,750,000 with a 2-year remaining useful life, and the residual value should be reduced to P250,000.
- What is the impairment loss for 2018? a. 4,000, b. 3.250. c. 2,250, d. 0
- On December 31, 2019, what is the carrying amount of the equipment? a. 3,500, b. 1,750, c. 1,500,
d. 1,000, Solution 61-10 Question 1 Answer c Cost - January 1, 2017 5,000, Accumulated depreciation - December 31, 2018 (5,000,000 - 1,000,000/8 x 2) (1,000,000) Carrying amount - December 31, 2018 4,000, Fair value - December 31, 2018 1,750, Impairment loss for 2018 2,250, Question 2 Answer d Carrying amount โ January 1, 2019 1,750, Depreciation for 2019 (1,750,000 - 250,000/2) (750,000) Carrying amount - December 31, 2019 1,000, Problem 61-11 (AICPA Adapted) On January 1, 2014, Walton Company purchased a machine for P2,000,000 and established an annual straight line depreciation rate of 10%, with no residual value. During 2018, the entity determined that the machine will not be economically useful in production process after December 31, 2018. The entity estimated that the machine had no residual value on December 31, 2018 and would be disposed of in early 2019 at a cost of P50,000. What amount of impairment loss should be reported for the machine for 2018? a. 1,250, b. 1,000, c. 1,050, d. 50, Solution 61-11. Answer c Cost - January 1, 2014 2,000, Accumulated depreciation - 12/31/2018 (200,000 x 5) 1,000, Carrying amount - December 31, 2018 1,000, Estimated cost of disposal 50, Impairment loss for 2018 1,050, The carrying amount plus the estimated cost of disposal should be recognized as impairment loss for 2018 because the machine was no longer be economically useful in production process after December 31, 2018.
What is the carrying amount of the equipment on December 31, 2018? a. 1.500. b. 500, c. 700, d. 0 Solution 61-13 Answer b Recoverable amount - January 1, 2018 700, Depreciation for 2018 (700,000/3.5 years remaining) 200, Carrying amount - December 31, 2018 500, Problem 61-14 (AICPA Adapted) On January 1, 2018, Leah Company owned a machine having a carrying amount of P2,400,000. The machine was purchased four years earlier for P4,000,000. The straight line depreciation is used. During December 2018, the entity determined that the machine suffered permanent impairment and will not be economically useful after December 31, 2018. The entity sold the machine for P650,000 on January 5, 2019. What amount should be recognized as impairment loss in 2018? a. 2,000, b. 1.750. c. 1,350, d. 0 Solution 61-14 Answer c Carrying amount โ January 1, 2018 2,400, Depreciation for 2018 (1,600,000/4). 400, Carrying amount - December 31, 2018 2,000, Recoverable amount equal to the sale price ( 650,000) Impairment loss for 2018 1,350, Problem 61-15 (AICPA Adapted) Marjorie Company acquired a machine for P3,200,000 on August 31.2015. The machine had a 5- year life, P500,000 residual value and was depreciated using the straight line method. On May 31, 2018, a test for recoverability revealed that the expected net future undiscounted cash inflows related to the continued use and eventual disposal of the machine amounted to P1,080,000. The fair value on same date was P1,350,000 with no residual value.
- What is the impairment loss that should be recognized on May 31, 2018? a. 635, b. 365, c. 500, d. 0
- What is the depreciation for June 2018? a. 63, b. 50, c. 45, d. 31, Solution 61- Question 1 Answer b Cost - August 31, 2015 3,200, Accumulated depreciation - May 31, 2018 (3,200,000 โ 500,000 x 33/60) (1,485,000) Carrying amount - May 31, 2018 1,715, Recoverable amount equal to fair value 1,350, Impairment loss 365, Question 2 Answer b Tom August 31, 2015 to May 31, 2018 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 2018 (1,350,000/27 months) 50,
