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    Problem 5: Solution and Explanation

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    jhobs
    On January 1, 2016, Onin Co. classified machinery as held for sale with a carrying amount of $720,000. The fair value less costs to sell was $600,000, so an impairment loss of $120,000 was recognized. In February, the fair value increased to $790,000. On July 1, 2016, Onin Co. sold the machinery for $750,000. An impairment loss was recognized initially, but no depreciation expense or further impairment was required after classification as held for sale. A gain of $30,000 was realized on sale.

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    Problem 5: Solution and Explanation

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    jhobs
    242 views3 pages
    On January 1, 2016, Onin Co. classified machinery as held for sale with a carrying amount of $720,000. The fair value less costs to sell was $600,000, so an impairment loss of $120,000 was recognized. In February, the fair value increased to $790,000. On July 1, 2016, Onin Co. sold the machinery for $750,000. An impairment loss was recognized initially, but no depreciation expense or further impairment was required after classification as held for sale. A gain of $30,000 was realized on sale.

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    Auditing Problem 5

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    On January 1, 2016, Onin Co. classified machinery as held for sale with a carrying amount of $720,000. The fair value less costs to sell was $600,000, so an impairment loss of $120,000 was recognized. In February, the fair value increased to $790,000. On July 1, 2016, Onin Co. sold the machinery for $750,000. An impairment loss was recognized initially, but no depreciation expense or further impairment was required after classification as held for sale. A gain of $30,000 was realized on sale.

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    242 views3 pages

    Problem 5: Solution and Explanation

    Uploaded by

    jhobs
    On January 1, 2016, Onin Co. classified machinery as held for sale with a carrying amount of $720,000. The fair value less costs to sell was $600,000, so an impairment loss of $120,000 was recognized. In February, the fair value increased to $790,000. On July 1, 2016, Onin Co. sold the machinery for $750,000. An impairment loss was recognized initially, but no depreciation expense or further impairment was required after classification as held for sale. A gain of $30,000 was realized on sale.

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    PROBLEM 5

    On January 1, 2016, Onin Co. decided to sell a machinery with a cost of 1200,000 and
    accumulated depreciation of 480,000. Depreciation of P10,000 per month has been provided by
    the company since it was acquired. The machinery will continue to be operated until sold. The
    company undertook all the necessary actions to be able to classify the asset as held for sale.
    On the same date, The fair value of asset amounted to 620,000 while the costs to sell total
    P20,000.

    On February 28, 2016, the plant had not been sold but there has been objective evidence that
    the fair value went up to P810,000.

    On July, 1, 2016, Onin Co. sold the machinery for P8,00,000 after incurring selling costs of
    P50,000.

    QUESTIONS:

    Based on the above data, compute the following:

    1. How much is the impairment loss to be recognized on January 1, 2016?


    a. Nil b. P100,000 c. P120,000 d. P500,000

    2. How much is the depreciation expense in 2016?


    a. Nil b. P20,000 c. P60,000 d. P120,000

    3. How much is the gain to be recognized in profit or loss in 2016 asa result of increase in the
    fair value of the asset?
    a. Nil b. P30,000 c. P120,000 d. P190,000

    4.How much is the net gain (or loss) on sale of the asset in 2016?
    a. Nil b. P30,000 c. P120,000 d. P190,000

    5. Carrying amount of other intangibles assets on December 31, 2009?


    a. P690,000 b. P980,000 c. P640,000 d. P706,667

    Solution and Explanation:

    1. Answer: C
    Cost of Machinery 1,200,000
    Less: Acc. Depreciation, 1/1/16 480,000
    Carrying Amount, 1/1/16 720,000
    Less: FV less costs to sell, 1/1/16
    (620,000-20,000) 600,000
    Impairment Loss 120,000

    An entity shall measure a noncurrent asset classified as held for sale at the lower of its
    carrying amount and fair value less costs to sell. (PFRS 5, par 15)
    An entity shall recognize an impairment loss for any initial or subsequent write-down of
    the asset to fair value less costs to sell. (PFRS 5, par 20)

    2. Answer: A
    Nil or Zero

    An entity shall not depreciate a noncurrent asset while it is classified as held for sale.
    (PFRS 5, par. 25)

    3. Answer: C
    Fair Value less costs to sell, 2/28/16
    (810,000 – 20,000) 790,000
    FV less costs to sell, 1/1/16
    (620,000-20,000) 600,000
    Increase in FV less costs to sell 190,000

    Impairment loss recognized (limit) 120,000

    Gain to be recognized 120,000


    An entity shall recognize a gain for any subsequent increase in fair value less costs to
    sell of an asset, but not in excess of the cumulative impairment loss that has been
    recognized either in accordance with PFRS 5 or previously in accordance with PAS 36.
    (PFRS 5, par 21)

    4. Answer: B
    Net sales proceeds (800,000 – 50,000) 750,000
    Carrying Amount after the reversal
    of Impairment Loss (600,000 – 120,000) (720,000)
    Gain on Sale 30,000
    The gain or loss arising from the derecognition of an item of property, plant and
    equipment shall be determined as the difference between the net disposal proceeds, if
    any, and the carrying amount of the item. (PAS 16, par 71)

    5. Answer: A
    Nil or Zero
    Since the fair value less costs of disposal is greater than the carrying amount at
    the date of reclassification, there is no impairment loss to be recognized.

    An entity shall recognise an impairment loss for any initial or subsequent write-
    down of the asset (or disposal group) to fair value less costs to sell, to the
    extent that it has not been recognised in accordance with paragraph 19.
    (PFRS 5, par 20)

    An entity shall recognise a gain for any subsequent increase in fair value less
    costs to sell of an asset, but not in excess of the cumulative impairment loss that
    has been recognised either in accordance with this IFRS or previously in
    accordance with PAS 36. (PFRS 5, par 21)

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