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Chapter 23
Impairment of Assets

NAME: Date:
Professor: Section: Score:

QUIZ 1:
1. Under PAS 36 Impairment of Assets, 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 net amount which an entity expects to obtain for an asset at the end of its useful life.
d. The amount at which an asset could be exchanged between knowledgeable, willing parties
in an arm's length transaction.

2. Under PAS 36 Impairment of Assets, which of the following terms best describes the higher of an
asset's fair value less costs of disposal and its value in use?
a. Recoverable amount
b. Revalued amount
c. Depreciable amount
d. Carrying amount

3. Under PAS 36 Impairment of assets, 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

4. According to PAS 36 Impairment of Assets, which of the following terms is defined as: "The
smallest identifiable group of assets that generates cash inflows that are largely independent of
the cash inflows from other assets"?
a. Non-current assets
b. A cash-operating unit
c. An operating segment
d. A cash-generating unit

5. PAS 36 Impairment of assets should be applied in accounting for the impairment of which of the
following types of asset?
a. Assets arising from construction contracts
b. Non-current assets held for sale
c. Investment properties measured at fair value
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d. Non-current assets measured at cost

6. According to PAS 36 Impairment of assets, which of the following are relevant in determining a
non-current asset's 'value in use'?
I. The expected future cash flows from the asset
II. The carrying amount of the asset
III. The future annual depreciation expense in respect of the asset
IV. The time value of money

a. I, II, III c. I, IV
b. II, III, IV d. I, II, IV

7. 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. Are the following statements true or false,
according to PAS 36 Impairment of assets?

1) If the individual asset does not generate cash inflows that are largely independent of those
from other assets, then the cash-generating unit should be identified.
2) If the individual asset generates an insignificant proportion of the cash inflows of the entity
as a whole, then the cash-generating unit should not be identified.

Statement (1) Statement (2)

a. False False
b. False True
c. True False
d. True True

8. The Naylor Company has determined that it needs to recognize an impairment loss on each of
two non-current assets; plant and land. The relevant amounts are as follows:
Plant Land
Original cost ₱700,000 ₱1,400,000
Previous revaluations Nil ₱ 450,000
Existing carrying amount ₱700,000 ₱1,850,000
Impairment loss to be recognized in year ₱200,000 ₱ 300,000

According to PAS 36 Impairment of Assets, how should each of the impairment losses be recognized?
Plant Land
a. In profit or loss In profit or loss
b. In profit or loss In other comprehensive income
c. In other comprehensive income In profit or loss
d. In other comprehensive income In other comprehensive income

9. On 1 January 20X2 The Prosper Company acquired a non-current asset with an estimated useful
life of 8 years for ₱320,000. Non-current assets are accounted for under the cost model and
depreciation is charged by the straight-line method.
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On 1 January 20X7 an impairment review identified an impairment loss of ₱10,000 and the
remaining useful life was revised to four years. Are the following statements true or false,
according to PAS 36 Impairment of Assets?

1) Future depreciation expenses should be measured by reference to the carrying amount after
deducting the impairment loss.
2) Future depreciation expenses should be measured by reference to the new estimate of the
remaining useful life.

Statement (1) Statement (2)

a. False False
b. False True
c. True False
d. True True

10. In testing a cash generating unit (CGU) for impairment the, bottom-up test means that
a. goodwill can be allocated to the CGU and an impairment loss has occurred if the recoverable
amount of the CGU is less than the carrying amount, including the allocated goodwill.
b. goodwill can be allocated to the CGU’s and an impairment loss occurred if the recoverable
amount of the CGU is less than its carrying amount, excluding the allocated goodwill
c. goodwill can be allocated to the CGU and an impairment loss has occurred if the recoverable
amount of the CGU is more than the carrying amount, including the allocated goodwill.
d. goodwill can be allocated to the CGU and an impairment loss has occurred if the recoverable
amount of the CGU is more than its carrying amount, excluding the allocated goodwill.

“Again, I tell you that if two of you on earth agree about anything you ask for, it will be done for you by my
Father in heaven. For where two or three come together in my name, there am I with them.”
(Matthew 18:19-20)

- END -
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ANSWERS TO QUIZ 1:
1. A 6. C
2. A 7. D
3. B 8. B
4. D 9. D
5. D 10. A

NAME: Date:
Professor: Section: Score:
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QUIZ 2:
1. On December 31, 20x1, MASSIVE HEAVY Co. identified that its building with a carrying
amount of ₱2,400,000 has been impaired. In estimating the recoverable amount, MASSIVE has
determined that the fair value less costs of disposal of the asset is ₱1,600,000.

In estimating the value in use, MASSIVE determined the following:

Future cash in Future cash out
Year flows flows
20x1 1,200,000 400,000
20x2 1,120,000 400,000
20x3 1,040,000 320,000

Additional information:
 Each year’s estimated future cash flows include ₱40,000 representing cash outflows from future
restructuring not yet committed and ₱20,000 representing cash outflows on planned
improvement and enhancement of the asset.
 Not included in the estimated future cash flows are costs of day-to-day servicing of the asset
amounting to ₱8,000 per year.
 The discount rate is 10%.

How much is the impairment loss?

a. 407,424 b. 456,773 c. 365,472 d. 412,365

2. On January 1, 20x1, RIGHTEOUS MORAL Co. acquired a piece of equipment for ₱2,000,000. The
equipment is depreciated using the straight line method over an estimated useful life of 10 years
and residual value of ₱200,000.

On January 1, 20x6, RIGHTEOUS Co. determined that the equipment is impaired. Fair value less
costs of disposal is ₱560,000. Projected future net cash flows from revenues produced by the
equipment is ₱200,000 annually. The revised estimated useful life is 4 years and the new estimated
residual value is ₱40,000. The appropriate discount rate is 10%. How much is the depreciation
expense in 20x6?
a. 156,732 b. 155,324 c. 155,132 d. 154,324

3. Information on LISTLESS WEAK Co.’s impaired building is shown below:

Carrying amount 3,200,000
Revaluation surplus 320,000
Fair value less costs of disposal 2,800,000
Value in use 2,720,000

How much is the impairment loss?

a. 80,000 b. 400,000 c. 320,000 d. 0
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4. INSUPERABLE UNSURPASSABLE Co. determined that its trademark is impaired.

INSUPERABLE cannot estimate reliably the trademark’s fair value less costs of disposal.
However, the following information has been determined:

Carrying amount ₱520,000

Annual future cash flows from the trademark 40,000
Discount rate 10%

How much is the impairment loss?

a. 0 b. 80,000 c. 120,000 d. 400,000

5. One of MIME IMMITATE Co.’s machines has been impaired. Repairs and maintenance costs on
the machine have been increasing over the past years making the machine a bottleneck in
MIME’s production. At year-end, management made a decision to sell the machine very soon.
Information on the machine is shown below:
Carrying amount ₱400,000
Fair value less costs of disposal 200,000
Value in use 240,000

How much is the impairment loss?

a. 0 b. 160,000 c. 40,000 d. 200,000

Use the following information for the next two questions:

INSTIGATE PROVOKE Co. determined that one of its cash-generating units is impaired.
Information on the assets of the CGU is shown below:

Carrying
Assets amount
Inventory 800,000
Investment property (at cost model) 1,600,000
Building 2,400,000
Goodwill 1,200,000
6,000,000

It was estimated that the value in use of the CGU is ₱3,600,000 and its fair value less costs of disposal
is ₱2,400,000.

6. How much is the impairment loss?

a. 4,200,000 b. 3,200,000 c. 2,400,000 d. 2,000,000

7. How much is the carrying amount of the building after the impairment testing?
a. 1,680,000 b. 1,120,000 c. 1,860,000 d. 2,040,000
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8. One of the machines of SKEWER PIERCE Co. has suffered physical damage but is still working,
although not as well as before it was damaged. The machine does not generate independent cash
inflows. The smallest identifiable group of assets that includes the machine and generates cash
inflows that are largely independent of the cash inflows from other assets is the production line
to which the machine belongs. Information on the machine and the production line is shown
below:

Carrying amount of machine ₱800,000

Fair value less costs of disposal of machine 600,000
Carrying amount of production line 32,000,000
Recoverable amount of production line 36,000,000

The budgets/forecasts approved by management reflect no commitment of management to replace

the machine. How much is the impairment loss?
a. 4,000,000 b. 200,000 c. 3,800,000 d. 0

Use the following information for the next two questions:

On January 1, 20x1, FALLACIOUS MISLEADING Co. acquired a building for ₱4,000,000. The asset
is depreciated using the straight line method over an estimated useful life of 10 years.

On January 1, 20x6, the building was estimated to have a recoverable amount of ₱1,600,000.
Consequently, impairment loss was recognized on that date. There was no change in the estimated
useful life.

On January 1, 20x9, the building was estimated to have a new recoverable amount of ₱2,400,000 and
a remaining useful life of 3 years. The building is measured under the revaluation model.

9. How much of the impairment reversal is recognized in profit or loss?

a. 160,000 b. 1,760,000 c. 1,600,000 d. 0

10. How much of the impairment reversal is recognized in equity?

a. 160,000 b. 1,760,000 c. 1,600,000 d. 0

“Praise be to the God and Father of our Lord Jesus Christ, the Father of compassion and the God of all
comfort, who comforts us in all our troubles, so that we can comfort those in any trouble with the comfort we
ourselves have received from God.” (2 Corinthians 1:3-4)
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SOLUTIONS TO QUIZ 2:
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1. A Solution:
The adjusted future cash outflows are computed as follows:
Future costs not yet
Unadjusted cash Costs of day-to-day Adjusted cash
Year committed & Costs of
outflows servicing out flows
improvement
(a) (b) = (40K + 20K) (c) (d) = (a) - (b) + (c)
20x1 400,000 60,000 8,000 348,000
20x2 400,000 60,000 8,000 348,000
20x3 320,000 60,000 8,000 268,000

The future net cash flows are computed as follows:

Year Cash in flows Adjusted cash out flows Net cash flows
(a) (b) (c) = (a) - (b)
20x1 1,200,000 348,000 852,000
20x2 1,120,000 348,000 772,000
20x3 1,040,000 268,000 772,000

The value in use is computed as follows:

Year Net cash flows PV of ₱1 factors Present value
20x1 852,000 PV of ₱1 @10%, n=1 0.909091 774,544
20x2 772,000 PV of ₱1 @10%, n=2 0.826446 638,016
20x3 772,000 PV of ₱1 @10%, n=3 0.751315 580,016
1,992,576

The recoverable amount is determined as follows:

Fair value less costs of disposal 1,600,000
Value in use 1,992,576
Recoverable amount (higher) 1,992,576
Impairment loss is computed as follows:
Recoverable amount 1,992,576
Carrying amount ( 2,400,000)
Impairment loss ( 407,424)

2. B
Solution:
The value in use is computed as follows:
PV factors @ 10%,
Future cash flows n=4 Present value
Annual cash flows from revenues 200,000 3.169865 633,972
Residual value 40,000 0.683013 27,320
661,292

New carrying amount on Jan. 1, 20x6

(Value in use - higher) ₱661,292
Revised residual value ( 40,000)
New depreciable amount 621,292
Divide by: Revised useful life 4
Depreciation expense – 20x6 ₱155,323

3. A
Solution:
Recoverable amount (FVLCS – higher) ₱2,800,000
Carrying amount ( 3,200,000)
Excess over carrying amount ( 400,000)
Offset to revaluation surplus 320,000
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Excess charged as Impairment loss (₱ 80,000)

4. C
Solution:
The recoverable amount or value in use is determined as follows:
Annual future cash flows from the trademark 40,000
Divide by: Discount rate 10%
Present value of indefinite cash flows (value in use) 400,000

Recoverable amount (value in use) ₱400,000

Carrying amount ( 520,000)
Impairment loss ₱120,000

5. D ₱200,000 (200,000 – 400,000).

6. C
Solution:
Impairment loss is computed as follows:
Recoverable amount (value in use – higher) ₱3,600,000
Carrying amount (6,000,000)
Impairment loss (₱2,400,000)

7. A
Solution:
Allocation of Impairment
Assets Carrying amount Fraction Loss
Inventory N/A N/A -
Investment property 1,600,000 1,600/4,000 480,000
Building 2,400,000 2,400/4,000 720,000
4,000,000 4,000/4,000 1,200,000

2,400,000 – 720,000 allocation of impairment loss = 1,680,000

8. D 0 - The production line is not impaired (i.e., the recoverable amount of ₱36M is higher than the
carrying amount of ₱32M).

9. A
Solution:
The carrying amount of the building on January 1, 20x9 is computed as follows:
Recoverable amount on January 1, 20x6 ₱1,600,000
Depreciation from 20x6 to 20x8 (400,000 x 3/5) ( 960,000)
Carrying amount on January 1, 20x9 ₱ 640,000

The carrying amount of the building on January 1, 20x9 had no impairment loss been recognized
previously is computed as follows:
Historical cost ₱4,000,000
Depreciation from 20x1 to 20x8 (4M x 8/10) ( 3,200,000)
Carrying amount on January 1, 20x9 (assuming no IL) ₱ 800,000
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2.4 Recoverable amount - Jan.

M 1, 20x9

CA had no IL recognized previously -

.8M Jan. 1, 20x9

.64M CA - Jan. 1, 20x9

Impairment loss recognized in profit or loss = (.8M - .64M) = ₱160,000

10. C Impairment loss recognized in other comprehensive income (equity) = (2.4M - .8M) = ₱1,600,000