Exercise 5

Palpable Company has determined that the furniture division is a cash generating unit. The entity calculated the value in use of the division to be P11,000,000.

The entity has also determined that the fair value less cost of disposal of the building is P6,500,000. The carrying amounts of the assets are:

Building 8,000,000

Equipment 4,000,000

Inventory 4,000,000

Required) A

1)Determine the impairment loss.

2)Allocate the impairment loss to the assets of the cash generating unit.

3)Prepare journal entry to record the impairment loss.

1. P 5,000,000

2.

Building= P 1,500,000

Equipment= P 1,750,000

Inventory= P 1,750,000

3.

Impairment loss         5,000,000

    AD- building                                1,500,000

    AD- equipment                           1,750,000

    Inventory                                     1,750,000

(AD= Accumulated depreciation)

Step-by-step explanation

1.

Carrying amount of CGU

    8,000,000

    4,000,000

    4,000,000 ................................. P 16,000,000

Value in use.....................................    (11,000,000)

Impairment loss............................. P  5,000,000

2.

Building (5,000,000 × 8/16)..........  2,500,000

Equipment (5,000,000 × 4/16)....  1,250,000

Inventory (5,000,000 × 4/16).......  1,250,000

Observe that after allocating the P 2,500,000 loss to the building, the carrying amount of the building would be P 5,500,000 which is lower than the fair value less cost of disposal of P 6,500,000.

Paragraph 105 of PAS 36 provides that the carrying amount of an asset shall not be reduced below the highest of fair value less cost of disposal, value in use and zero.

The amount of impairment loss that would otherwise have been allocated to the asset shall be allocated prorata to the other assets of the cash generating unit.

Accordingly, only P 1,500,000 loss is allocated to the building and the balance of P 1,000,000 is reallocated to the equipment and inventory prorata.

Reallocated loss:

Equipment (1,000,000 × 4/8)..... 500,000

Inventory (1,000,000 × 4/8)........ 500,000

Impairment loss:

Building........................................................ 1,500,000

Equipment (1,250,000+500,000)..  1,750,000

Inventory (1,250,000+500,000).....  1,750,000