REVALUATION MODEL, IMPAIRMENT LOSS, and CASH GENERATING UNIT
On January 1, 20x1, Young Jaeree Company showed land with carrying amount of P10,000,000 and building with
cost of P60,000,000 and accumulated depreciation of P18,000,000. The land and building were revalued on the
same date and revealed the fair value of land at P15,000,000 and the building at P70,000,000. The original useful life
of the building is 20 yrs and depreciation is computed on the straight line. The income tax rate is 30%.
1. What is the revaluation surplus on January 1, 20x1?
a. P33,000,000 b. P23,100,000 c. P28,000,000 d. P19,600,000
2. What is the revaluation surplus on December 31, 20x1?
a. P33,000,000 b. P23,100,000 c. P21,450,000 d. P21,700,000
3. What is the annual depreciation for 20x1?
a. P5,000,000 b P3,500,000 c. P4,500,000 d. P3,000,000
4. Presented below is information related to equipment owned by King Cobra Company:
Cost P9,000,000
Accumulated Depreciation 1,500,000
Fair value less cost to sell 3,200,000
King Cobra Company will continue to use the asset for its remaining 5 year life, at the end of which it is expected to
be sold at P500,000. Expected cash inflows from the use of the asset is P1,500,000, after incurring production costs
including annual maintenance of P700,000. The appropriate discount rate is 10%. The present value:
Single payment of 1 at 10% for 5 periods 0.6209
Ordinary annuity of 1 a 10% for 5 periods 3.7908
How much is the impairment loss?
a. P4,156,910 b. P3,343,090 c. P 568,618 d. P3,032,640
5. In which of the following scenarios will an entity not record an impairment loss?
a. Scenario 1 b. Scenario 3
Carrying amount P10,000 Carrying amount P14,000
Fair value 12,000 Fair value 15,000
Value in use 9,000 Value in use 13,500
Legal fees on selling the asset 1,500 Cost of removing the asset 1,000
Termination benefits 1,000 Termination benefits 500
Documentary stamp tax 500 Documentary stamp tax 500
Decommision cost 1,000 Decommision cost 1,000
c. Scenario 2 d. Scenario 4
Book value P15,000 Book value P14,000
Fair value 12,000 Fair value 15,000
Value in use 10,500 Value in use 13,500
Direct incremental costs to bring 1,500 Legal fees on selling the asset 1,000
an asset into condition for its sale
Termination benefits 1,000 Termination benefits 500
Documentary stamp tax 500 Documentary stamp tax 500
Cost associated with reducing 1,000 Reorganizing the business following 1,000
the disposal of asset
6. The following information relates to three assets held by a Company:
Asset A Asset B Asset C
Carrying amount P100 P50 P40
Value in use 80 60 35
FV less cost to sell 90 65 30
What is the impairment loss?
a. P5 b. P10 c. P15 d. 0
7. The following information relates to four assets held by a Company:
Asset A Asset B Asset C Asset D
Carrying amount P120 P30 P40 P70
Value in use 80 70 80 20
FV less cost to sell 90 40 70 30
What is the impairment loss?
a. P30 b. P40 c. P70 d. 0
8. Which TWO of the following could be an indication that an asset may be impaired according to IAS 36 Impairment
of Assets
a. Decrease in market interest rates
b. Increase in market values in the asset
c. Damaage caused to the asset
d. Management intention to reorganize the business
9. Finny Co. has a cash generating unit (CGU) that suffers a large drop in income due to reduced demand for its
products. An impairment review was carried out and the recoverable amount of the CGU was determined at
P100,000,000. The assets of the CGU had the following carrying amounts immediately prior to the impairment:
Goodwill P25,000,000
Intangibles 60,000,000
Property, plant, and equipment 30,000,000
Inventory 15,000,000
Trade receivables 10,000,000
Total P140,000,000
The inventory and receivables are considered to be included at their recoverable amounts
What is the carrying amount of the intangibles once the impairment loss has been allocated?
a. P45,000,000 b. P50,000,000 c. P55,000,000 d. P60,000,000
For questions 10 to 11:
A division of enttry has the following balances in its financial statements:
Goodwill P700,000
Plant 950,000
Building 2,300,000
Intangibles 800,000
Other net assets 430,000
Following a period of losses, the recoverable amount of the division is deemed to be P4,000,000. A recent valuation
of the building has a market value of P2,500,000. The other net assets are at their recoverable amount. The entity
uses the cost model for valuing building and plant.
10. To the nearest thousand, what is the balace on the building following the impairment review?
a. P2,300,000 b. P2,500,000 c. P2,027,000 d. P1,775,000
11. To the nearest thousand, what is the balace on the plant following the impairment review?
a. P862,000 b. P837,000 c. P689,000 d. P261,000
12. A vehicle was involved in an accident exactly halfway through the year. The vehicle cost P10,000 and had a
remaining life of 10 years at the start of the year. Following the accident, the experted present value of cash flows
associated with the vehicle was P3,400 and the FV less cost to self was P6,560. What is the recoverable amount of
the vehicle following the accident?_____________
For questions 13-17:
On December 31, 2019, Humous subjected to impairment test a piece of equipment. Data pertinent to the equipment
as of December 31, 2019 follows:
Original Cost P2,400,000
Adjusted Accumulated Depreciation 600,000
Selling price 1,400,000
Estimated cost to make the sale 200,000
Value in use 1,100,000
Remaining useful life 6 years
Method of depreciation Straight line
On December 31, 2021, the asset is found to have a recoverable amount of P1,300,000.
13. How much loss impairment is recognized in 2019?
a. P400,000 b. P500,000 c. P600,000 d. P700,000
14. How much is the depreciation expense recognized in 2020?
a. P200,000 b. P266,667 c. 300,000 d. P333,333
15. How much gain on recovery is recognized in 2021?
a. P500,000 b. P400,000 c. P300,000 d. P200,000
16. How much is the depreciation expense recognized in 2022 under the cost model?
a. P325,000 b. P300,000 c. P250,000 d. P200,000
17. How much is the depreciation expense recognized in 2022 under the revaluation model?
a. P325,000 b. P300,000 c. P250,000 d. P200,000
INTANGIBLE ASSETS
Research and Development Cost
Problem 1: (R & D Cost) Amparo Co. incurred the following costs during the year:
1 Cost of activities aimed at obtaining new knowledge P200,000
2 Marketing research to study consumer tastes 100,000
3 Cost of developing and producing a prototype model 60,000
4 Cost of testing the prototype model for safety and environmental friendliness 100,000
5 Cost of revising designs for flaws in the prototype model 50,000
6 Salaries of employees, consultants, and technicians involved in R&D 80,000
7 Cost of conference for the introduction of the newly developed product including fee of a 100,000
model hired as endorser
8 Advertising to establish recognition of the newly developed product 70,000
9 Cost incurred on search for alternatives for materials, devices, products, processes, systems 40,000
or services
10 Cost of final selection of possible alternatives for a new process 33,000
11 Trouble-shooting during commercial production 25,000
12 Periodic or routine design changes to existing products 10,000
13 Modification of design for a specific customer 100,000
14 Payments made to other company under a contract to performed research and development 80,000
to Amparo Co.
15 Cost of design, construction and operation of a pilot plant that is not of a scale economically 50,000
feasible for commercial production
16 Cost of design, construction and operation of plant that is feasible for commercial production 33,000
17 Cost of design of tools, jigs, molds and dies involving new technology 20,000
18 Cost of routine, seasonal, and periodic design of tools, jigs, molds, and dies 22,000
19 Cost of engineering follow through in an early phase of commercial production 110,000
20 Cost of qualty control during commercial production 35,000
21 Adaptation of an existing capability to a particular customer’s need 40,000
22 Cost of acquired building to be used in various R&D projects 500,000
23 Depreciation on the building described above 50,000
24 Cost of machine acquired to be used on only one R&D project 800,000
25 Radical modification to the formulation of a chemical product 60,000
26 Laboratory research aimed at discovery of new technology 48,000
Required: Compute for research and development expense
a. P1,670,000 b. P1,671,000 c. P1,672,000 d. P1,673,000
Initial Measurement
Problem 2: (Trademark) On January 1, 20x6, Angeles Co. incurred the following costs for the generation of
trademark:
Cost of materials and services used or consumed in generating the trademark P500,000
Amortization of patents and licenses that were used to generate the trademark 25,000
Selling, administrative and other general overhead expenditures 60,000
Borrowing costs arising specifically from the funds borrowed for the generation of the trademark 10,000
Advertising and promotional costs for the product generated by the trademark 20,000
Cost of employee benefits incurred in generating the trademark 40,000
Fees to register the trademark 20,000
Required: Compute for capitalizable cost for trademark 595,000
Problem 3: (Change in Estimate) On January 1, 2011, Debera Company purchased a patent for P600,000. The
patent was being amortized over its remaining legal life of 15 years expiring on January 1, 2026. During 2016,
Debera determined that the economic benefits of the patent would not last longer than ten years from the date of
acquisition.
What is the carrying amount of patent on December 31, 2016?
a. P300,000 b. P310,000 c. P320,000 d. P330,000
Problem 4: (Website Cost) The following costs were incurred by Elmundo Company in developing its website:
Undertaking feasibilty studies P20,000
Evaluating alternative products and suppliers 15,000
Purchasing or developing hardware 16,000
Obtaining a domain name 8,000
Installing developed applications on the web server 20,000
Stress testing 3,000
Designing the appearance (e.g. layout and color) of web pages 40,000
Creating, purchasing, preparing (e.g. creating links and identfying tags) and uploading 15,000
information
Updating graphics and revising content 3,000
Adding new functions, features, and content 8,000
Reviewing security acces 8,000
Training employees to operate the web site 6,000
Required: Compute for the website cost to be included as intangible assets assuming:
1. The website is developed solely or primarily or promoting and advertising an entity’s own product and services.
a. P100,000 b. P104,000 c. P106,000 d. 0
2. The website arises from development and is for internal or external access and shall be used for placing orders
and the expenditures can be directly attributed to preparing the web site to operate in the manner intended by the
management.
a. P100,000 b. P104,000 c. P106,000 d. 0
Problem 5: (Trademark) On January 1, 20x6, Abby Company bought a trademark from Ekis Company for
P4,500,000. Ekis retained an independent consultant who estimated the trademark life to be indefinite. Its carrying
amount in Ekis’s accounting records was P4,000,000.
Required: In Ekis’s December 31, 20x6 statement of financial position, what amount should be reported as trade
mark
a. P4,000,000 b. P4,500,000 c. P5,000,000 d. P5,500,000
Solution: Carrying amount is equal to the cost of P4,500,000 because the trademark has an indefinite life, therfore no amortization is recognized.
DEPLETION
For numbers 1 to 2:
On July 1, 20x4, Lita Company, a calendar year entity, purchased the rights to a mine. The total purchase price was
P14,000,000 (acquisition cost, developmental cost, exploration cost and restoration cost at present value), of which
P2,000,000 was allocable to the land. Estimated reserves were 1,500,000 tons. The entity expects to extract and sell
25,000 tons per month.
The entity purchased new equipment-A on July 1, 20x4. The equipment was purchased for P8,000,000 and had a
useful life of 8 years. However, after all the resource is removed, the equipment will be of no use and will be sold for
P500,000.
The entity purchased new equipment-B on July 1, 20x4. The equipment was purchased for P8,000,000 and had a
useful life of 4 years. However, after all the resource is removed, the equipment will be of no use and will be sold for
P500,000.
1. What is the depletion for 20x4?
a. P1,200,000 b. P1,400,000 c. P1,950,000 d. P2,400,000
2. What is the depreciation of the equipment for 20x4?
a. P1,468,750 b. P1,500,000 c.. P1,687,500 d. P1,937,500
3. In 20x2, Newman Company paid P5,000,000 to purchase lamd containing total estimated 800,000 tons of
extractable mineral deposit. The estimated value of the property after the mineral has been removed is P1,000,000.
Extraction activities began in 20x3, and by the end of the year, 100,000 tons had been recovered and sold. In 20x4,
geological studies indicated that the total amount of mineral deposit had been underestimated by 125,000 tons.
During 20x4, 150,000 tons were extracted and 140,000 tons were sold. What is the depletion rate per ton in 20x4?
a. P4.24 b. P4.32 c. P4.85 d. P5.19
4. Palm Corporation was organized on January 2, 20x5. It was authorized to issue 74,000 shares of ordinary share.
On the date of organization, it sold 20,000 shares at P50 per share and gave the remaining shares in exchange for
certain land-bearing recoverable ore deposits estimated by geologists at 900,000 tons. The property is deemed to
have a value of P2,700,000 with no residual value.
During 20x5, purchases of mine buildings and equipment totaled P261,000. During the year, 75,000 tons were mined;
8,000 tons of this amounts were unsold on December 31, the balance of tonnage being sold for cash at P17 per ton.
Expenses incurred and paid during the year, exclusive of depletionand depreciation, were as follows:
Mining P173,500
Delivery 20,000
General and administrative 19,500
Cash dividends of P2 per share were declared on December 31, payable January 15, 20x6. It is believed that
buildings and sheds will be useful only over the life of the mine, hence, depreciation is to be recognized in terms of
mine output. How much is the net income for 20x5?
a. P705,570 b. P723,630 c. P724,070 d. 765,570
