Chapter 26

Problem 26-4 1. Impairment loss Accumulated depreciation Cost Accumulated depreciation Book value January 1 Recoverable value Impairment loss 2. Depreciation (1,500,000 / 3) Accumulated depreciation 3. Cost Accumulated depreciation (2,100,000 + 900,000 + 500,000) Book value December 31 Problem 26-5 1. Impairment loss Accumulated depreciation Cost January 1 Accumulated depreciation (2,500,000 500,000 / 8 x 2) Book value January 1 Recoverable value Impairment loss 2. Depreciation Accumulated depreciation (875,000 125,000 / 2) 3. Cost Accumulated depreciation (500,000 + 1,125,000 + 375,000) Book value December 31 Problem 26-6 1. Offer price Cost of dismantling and removal assumed by the bidder Fair value less cost to sell Present value of future cash flows Less: Estimated liability Value in use Carrying amount Less: Estimated liability Adjusted carrying amount Recoverable amount fair value less cost to sell, being the higher amount Impairment loss 25,000,000 5,000,000 30,000,000 33,000,000 5,000,000 28,000,000 39,000,000 5,000,000 34,000,000 30,000,000 4,000,000 375,000 375,000 2,500,000 2,000,000 500,000 1,125,000 1,125,000 2,500,000 500,000 2,000,000 875,000 1,125,000 500,000 500,000 4,500,000 3,500,000 1,000,000 900,000 900,000 4,500,000 2,100,000 2,400,000 1,500,000 900,000

PAS 36, paragraph 78, provides that the fair value less cost to sell is equal to the estimated selling price plus the estimated liability assumed by the buyer. The standard further provides that to perform a meaningful comparison between the carrying amount and recoverable amount, the estimated liability assumed by the buyer is deducted in determining both the value in use and carrying amount of the asset. 2. Impairment loss Accumulated depreciation Problem 26-7 1. 2008 2009 2010 2011 Total value in use Net cash inflows 18,000,000 15,000,000 15,000,000 12,000,000 60,000,000 PV factor .930 .857 .794 .735 Present value 16,740,000 12,855,000 11,910,000 8,820,000 50,325,000 4,000,000 4,000,000

2. The recoverable amount is the value in use of P50,325,000 because this is higher than the fair value less cost to sell of P48,000,000. 3. Impairment loss Accumulated depreciation (65,000,000 50,325,000) 4. Depreciation Accumulated depreciation (50,325,000 / 4) Problem 26-8 1. Depreciation Accumulated depreciation (10,000,000 / 10) 2. Depreciation Accumulated depreciation 3. Impairment loss Accumulated depreciation 4. Depreciation Accumulated depreciation (6,000,000 / 8) 5. Accumulated depreciation Gain on impairment recovery Cost 1/1/2006 Accumulated depreciation (10,000,000 / 10 x 2) Book value 12/31/2007 Impairment loss 2007 Adjusted book value 12/31/2007 Depreciation 2008 (6,000,000 / 8) Book value 12/31/2008 Cost 1/1/2006 Accumulated depreciation (10,000,000 / 10 x 3) 1,000,000 1,000,000 1,000,000 1,000,000 2,000,000 2,000,000 750,000 750,000 1,750,000 1,750,000 10,000,000 2,000,000 8,000,000 2,000,000 6,000,000 750,000 5,250,000 10,000,000 3,000,000 14,675,000 14,675,000 12,581,250 12,581,250

Book value 12/31/2008 (assuming no impairment) Recorded book value Gain on reversal of impairment

7,000,000 5,250,000 1,750,000

The fair value or recoverable value of P7,500,000 cannot exceed the book value that would have been determined assuming no impairment is recognized. Problem 26-9 1. Impairment loss Accumulated depreciation (35,000,000 30,000,000) 2. Depreciation Accumulated depreciation (30,000,000 / 5) 5,000,000 5,000,000 6,000,000 6,000,000

Observe that the undiscounted net cash flows from the asset amount to P37,500,000 for 5 years. This amount is more than the book value of the machinery. Under American Standard, no impairment loss should be recognized in this case. However, under the PAS 36, if the recoverable amount is less than carrying amount, an impairment loss is recognized, regardless of the amount of undiscounted cash flows whether less than or more than the carrying amount. PAS 36 has totally rejected the concept of undiscounted cash flows for impairment purposes. Problem 26-10 1. Value in use (1,500,000 x 5.65) 2. Impairment loss Accmulated depreciation Buildings Accumulated depreciation (22,500,000 / 20 x 6) Book value 1/1/2008 Fair value higher than value in use Impairment loss 3. Depreciation Accumulated depreciation (10,000,000 / 10) Problem 26-11 1. Value in use (800,000 x 3.99) 2. Impairment loss Accumulated depreciation Machinery Accumulated depreciation Book value 1/1/2008 Present value of cash flows higher than fair value Impairment loss 3. Depreciation Accumulated depreciation (3,192,000 / 5) 638,400 638,400 3,192,000 308,000 308,000 5,000,000 1,500,000 3,500,000 3,192,000 308,000 8,475,000 8,250,000 8,250,000 25,000,000 6,750,000 18,250,000 10,000,000 8,250,000 1,000,000 1,000,000

Problem 26-12 1. Total carrying amount Value in use Impairment loss 2. Impairment loss allocated to goodwill Impairment loss allocated to the other assets

5,000,000 3,600,000 1,400,000 500,000 900,000 1,400,000

When an impairment loss is recognized for a cash generating unit, the loss is allocated to the assets of the unit in the following order: a. b. First, to the goodwill, if any. Then, to all other assets of the unit prorata based on their carrying amount. Carrying amount 2,000,000 1,500,000 1,000,000 4,500,000 Fraction 20/45 15/45 10/45 Loss 400,000 300,000 200,000 900,000

Building Inventory Trademark

3. Impairment loss Goodwill Accumulated depreciation building Inventory Trademark Problem 26-13 1. Carrying amount Value in use Impairment loss 2. Allocation of impairment loss Building (8/16 x 5,000,000) Equipment (4/16 x 5,000,000) Inventory (4/16 x 5,000,000)

1,400,000 500,000 400,000 300,000 200,000

16,000,000 11,000,000 5,000,000

2,500,000 1,250,000 1,250,000 5,000,000

Observe that after allocating the P2,500,000 loss to the building, the carrying amount of the building would be P5,500,000 which is lower than its fair value of P6,500,000. Accordingly, only P1,500,000 loss is allocated to the building and the balance of P1,000,000 is reallocated to the equipment and inventory prorata.

Allocated loss Reallocated loss (4/8 x 1,000,000) (4/8 x 1,000,000) Impairment loss

Building 2,500,000 (1,000,000) _________ 1,500,000

Equipment 1,250,000 500,000 _________ 1,750,000

Inventory 1,250,000

500,000 1,750,000

3. Impairment loss Accumulated depreciation building Accumulated depreciation equipment Inventory

5,000,000 1,500,000 1,750,000 1,750,000

Problem 26-19 All Unimarts stores are in different locations and probably have different customer profile. So although Smart is managed at the corporate level, Smart generates cash inflows that are largely independent from those of the other Unimarts stores. Therefore, it is likely that Smart in itself is a cash generating unit.

Problem 26-20 It is likely that the recoverable amount of an individual magazine title can be assessed. Even though the level of advertising income for a title is influenced to a certain extent by the other titles in the customer segment, cash inflows from direct sales and advertising are identifiable for each title. In addition, decisions to abandon titles are made on an individual basis. Accordingly, the individual magazine titles generate cash inflows that are largely independent from one another and therefore, each magazine title is a separate cash generating unit.

Problem 26-21 Case 1 1. A is separate cash generating unit because there is an active market for As products. 2. Although there is an active market for the products of B and C, cash inflows from B and C depend on the allocation of production across two countries. It is unlikely that cash inflows from B and C can be determined individually. Therefore, B and C, together should be treated as a cash generating unit.

Case 2 a. A cannot be treated as a separate cash generating unit because its cash inflows depend on the sales of the final product by B and C, since there is no active market for As product. As a consequence, A, B and C, together, and therefore, Maximus Company, as a whole, should be treated as the largest single cash generating unit.

b.

Problem 26-22 The primary purpose of the building is to serve as a corporate asset supporting Litmus Companys manufacturing operations. Therefore, the building in itself cannot be considered to generate cash inflows that are largely independent of the cash inflows from the entity as a whole. In this case, the cash generating unit is Litmus Company as a whole. The building is not held for investment. Thus, it is not appropriate to determine the value in use of the building based on the cash inflows of related rent.

Problem 26-23 Answer C Cost, January 1, 2005 Accumulated depreciation, December 31, 2007 (100,000 x 3) Book value, December 31, 2007 Recoverable value Impairment loss The loss is recorded as follows: Impairment loss Accumulated depreciation Cost Accumulated depreciation (300,000 + 300,000) Recoverable value, January 1, 2008 Depreciation for 2008 (200,000 / 5) Book value, December 31, 2008 Problem 26-24 Answer B From August 31, 2005 to May 31, 2008 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 2008 (1,350,000 / 27 months) Cost Accumulated depreciation 5/31/2008 (3,200,000 500,000 x 33/60) Book value 5/31/2008 Fair value Impairment loss Problem 26-25 Answer B Cost January 1, 2004 Accumulated depreciation, December 31, 2007 (900,000 / 10 x 4) Book value, December 31, 2007 Depreciation for 2008 (640,000 40,000 / 4) Book value, December 31, 2008 Problem 26-26 Answer C Book value, 1/1/2008 Depreciation for 2008 (1,600,000 / 4) Book value, 12/31/2008 Sales price-recoverable value Impairment loss Problem 26-27 Answer C Depreciation for 2008 (10% x 2,000,000) Cost 1/2/2004 Accumulated depreciation - 12/31/08 (200,000 x 5) Book value-12/31/2008 200,000 2,000,000 1,000,000 1,000,000 2,400,000 400,000 2,000,000 650,000 1,350,000 1,000,000 360,000 640,000 150,000 490,000 50,000 3,200,000 1,485,000 1,715,000 1,350,000 365,000 300,000 300,000 800,000 600,000 200,000 40,000 160,000 800,000 300,000 500,000 200,000 300,000

Estimated cost of disposal Impairment loss Problem 26-28 Answer C Cost Accumulated depreciation 1/1/2008 (2,000,000 100,000 / 10 x 2.5) Book value 1/1/2008 Fair value Impairment loss Problem 26-29 Answer C Cost 12/31/2004 Accumulated depreciation 8/31/2008 (2,400,000 / 96 months x 44) Book value 8/31/2008 Fair value Impairment loss Problem 26-30 Answer C Carrying value Decommissioning cost Adjusted carrying value Fair value less cost to sell higher (20,000,000 less 1,000,000) Impairment loss Value in use Decommissioning cost Adjusted value in use

50,000 1,050,000

2,000,000 475,000 1,525,000 600,000 925,000

2,800,000 1,100,000 1,700,000 1,500,000 200,000

28,000,000 ( 8,000,000) 20,000,000 19,000,000 1,000,000 26,000,000 ( 8,000,000) 18,000,000

Problem 26-31 Answer C Carrying value 12/31/2007 Depreciation for 2008 (20%) Carrying value 12/31/2008 Carrying value 12/31/2008 (assuming no impairment) Reversal of impairment loss 7,000,000 (1,400,000) 5,600,000 7,200,000 1,600,000