Valix Finacc vol 1 Problem 19-36 to 38

Financial Accounting Volume 1 2008 Valix-Peralta
Chapter 19 Problem 19-36 to 38

Problem 19-36  Answer  C

Cost – 12/31/2004                                                                                                           2,800,000

Accumulated depreciation – 8/31/2008 (2,400,000 / 96 months x 44)                1,100,000

Book value – 8/31/2008                                                                                                  1,700,000

Fair value                                                                                                                        1,500,000 Impairment loss                                                                                                          200,000

                                                                                                                  259

 

Problem 19-37  Answer  C   

Carrying value                                                                                                 28,000,000

Decommissioning cost                                                                                               (  8,000,000)

Adjusted carrying value                                                                                              20,000,000

Fair value less cost to sell – higher (20,000,000 less 1,000,000)                          19,000,000

Impairment loss                                                                                                             1,000,000

Value in use                                                                                                                 26,000,000

Decommissioning cost                                                                                               (  8,000,000)

Adjusted value in use                                                                                                  18,000,000

Problem 19-38  Answer  C

Carrying value – 12/31/2007                                                                                        7,000,000

Depreciation for 2008 (20%)                                                                                          (1,400,000)

Carrying value – 12/31/2008                                                                                        5,600,000

Carrying value – 12/31/2008 (assuming no impairment)                                             7,200,000

Reversal of impairment loss                                                                                        1,600,000

Valix Finacc vol 1 Problem 19-30 to 35

Financial Accounting Volume 1 2008 Valix-Peralta
Chapter 19 Problem 19-30 to 35

Problem 19-30  Answer  C

                                                                                                                                   

Cost, January 1, 2005                                                                                                     800,000

Accumulated depreciation, December 31, 2007 (100,000 x 3)                                       300,000

Book value, December 31, 2007                                                                                     500,000

Recoverable value                                                                                                         200,000

Impairment loss                                                                                                              300,000

The loss is recorded as follows:

Impairment loss                                                                                      300,000

            Accumulated depreciation                                                                               300,000

Cost                                                                                                                                800,000

Accumulated depreciation (300,000 + 300,000)                                                             600,000

Recoverable value, January 1, 2008                                                                              200,000

Depreciation for 2008 (200,000 / 5)                                                                                   40,000

Book value, December 31, 2008                                                                                     160,000

         

Problem 19-31  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)                                   50,000

Cost                                                                                                                             3,200,000

Accumulated depreciation – 5/31/2008 (3,200,000 – 500,000 x 33/60)             1,485,000

Book value – 5/31/2008                                                                                               1,715,000

Fair value                                                                                                                     1,350,000

Impairment loss                                                                                                              365,000

                                                                                                                                                   Problem 19-32  Answer  B                                                                  

Cost – January 1, 2004                                                                                     1,000,000

Accumulated depreciation, December 31, 2007 (900,000 / 10 x 4)                                360,000

Book value, December 31, 2007                                                                                     640,000

Depreciation for 2008 (640,000 – 40,000 / 4)                                                                   150,000

Book value, December 31, 2008                                                                                     490,000

Problem 19-33  Answer  C                                                 

Book value, 1/1/2008                                                                                                   2,400,000

Depreciation for 2008 (1,600,000 / 4)                                                                              400,000

Book value, 12/31/2008                                                                                               2,000,000

Sales price-recoverable value                                                                                        650,000 Impairment loss                                                                                                       1,350,000                                                                                                                                             

Problem 19-34  Answer  C

Depreciation for 2008 (10% x 2,000,000)                                                                         200,000

Cost – 1/2/2004                                                                                                           2,000,000

Accumulated depreciation - 12/31/08 (200,000 x 5)                                                   1,000,000

Book value-12/31/2008                                                                                               1,000,000

Estimated cost of disposal                                                                                               50,000

Impairment loss                                                                                                          1,050,000

Problem 19-35  Answer  C

Cost                                                                                                                             2,000,000

Accumulated depreciation – 1/1/2008 (2,000,000 – 100,000 / 10 x 2.5)                          475,000

Book value – 1/1/2008                                                                                     1,525,000

Fair value                                                                                                                        600,000

Impairment loss                                                                                                              925,000

�   J � � � � G ��F             15,000,000                  .857                12,855,000

            2010                                                15,000,000                  .794               11,910,000

            2011                                                12,000,000                  .735                  8,820,000

                                                                   60,000,000

            Total value in use                                                                                   50,325,000

                                                                                                                                               

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                                                                              14,675,000

            Accumulated depreciation (65,000,000 – 50,325,000)                        14,675,000

4. Depreciation                                                                                  12,581,250

            Accumulated depreciation (50,325,000 / 4)                                                   12,581,250

Problem 19-20

1. Depreciation                                                                                   1,000,000

            Accumulated depreciation (10,000,000 / 10)                                      1,000,000

2. Depreciation                                                                                   1,000,000

            Accumulated depreciation                                                                            1,000,000

3. Impairment loss                                                                               2,000,000

            Accumulated depreciation                                                                            2,000,000

4. Depreciation                                                                                      750,000

            Accumulated depreciation (6,000,000 / 8)                                                         750,000

5. Accumulated depreciation                                                 1,750,000

            Gain on impairment recovery                                                             1,750,000

Cost – 1/1/2006                                                                                                          10,000,000

Accumulated depreciation (10,000,000 / 10 x 2)                                                          2,000,000

Book value – 12/31/2007                                                                                              8,000,000

Impairment loss – 2007                                                                                                 2,000,000

Adjusted book value – 12/31/2007                                                                               6,000,000

Depreciation – 2008 (6,000,000 / 8)                                                                                  750,000

Book value – 12/31/2008                                                                                              5,250,000

Cost – 1/1/2006                                                                                                          10,000,000

Accumulated depreciation (10,000,000 / 10 x 3)                                                          3,000,000

Book value – 12/31/2008 (assuming no impairment)                                                  7,000,000

Recorded book value                                                                                      5,250,000

Gain on reversal of impairment                                                                                   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.

Valix Finacc vol 1 Problem 19-29

Financial Accounting Volume 1 2008 Valix-Peralta
Chapter 19 Problem 19-29

The primary purpose of the building is to serve as a corporate asset supporting Litmus Company’s 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.

Valix Finacc vol 1 Problem 19-26

Financial Accounting Volume 1 2008 Valix-Peralta
Chapter 19 Problem 19-28

Case 1

1.       A is separate cash generating unit because there is an active market for A’s 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 A’s product.

b.      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.

Valix Finacc vol 1 Problem 19-27

Financial Accounting Volume 1 2008 Valix-Peralta
Chapter 19 Problem 19-27

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.

Valix Finacc vol 1 Problem 19-26

Financial Accounting Volume 1 2008 Valix-Peralta
Chapter 19 Problem 19-26

All Unimart’s 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 Unimart’s stores. Therefore, it is likely that Smart in itself is a cash generating unit.

Valix Finacc vol 1 Problem 19-25

Financial Accounting Volume 1 2008 Valix-Peralta
Chapter 19 Problem 19-25

1.  Carrying amount                                                                                                   16,000,000

     Value in use                                                                                                           11,000,000

     Impairment loss                                                                                                       5,000,000

2.  Allocation of impairment loss

    Building (8/16 x 5,000,000)                                                                                        2,500,000

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

    Inventory (4/16 x 5,000,000)                                                                          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.

                                                                                Building           Equipment       Inventory

Allocated loss                                                          2,500,000          1,250,000          1,250,000

Reallocated loss                                                     (1,000,000)        

    (4/8 x 1,000,000)                                                                              500,000

    (4/8 x 1,000,000)                                                   _________        _________           500,000

Impairment loss                                                       1,500,000          1,750,000          1,750,000

3.  Impairment loss                                                                              5,000,000

            Accumulated depreciation – building                                                            1,500,000

            Accumulated depreciation – equipment                                                       1,750,000

            Inventory                                                                                                         1,750,000 

Valix Finacc vol 1 Problem 19-24

Financial Accounting Volume 1 2008 Valix-Peralta
Chapter 19 Problem 19-24

1.  Total carrying amount                                                                                            5,000,000

     Value in use                                                                                                            3,600,000

     Impairment loss                                                                                                      1,400,000

2.  Impairment loss allocated to goodwill                                                                     500,000

     Impairment loss allocated to the other assets                                                          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.      First, to the goodwill, if any.

b.      Then, to all other assets of the unit prorata based on their carrying amount.

                                                                                                Carrying amount           Fraction             Loss

    Building                                                               2,000,000                      20/45             400,000

    Inventory                                                           1,500,000                      15/45             300,000 

    Trademark                                                         1,000,000                      10/45             200,000

                                                                              4,500,000                                           900,000

3.  Impairment loss                                                                              1,400,000

            Goodwill                                                                                                            500,000

            Accumulated depreciation – building                                                               400,000

            Inventory                                                                                                            300,000

            Trademark                                                                                                          200,000