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Question 1
Calculate impairment if any

Rupees
Carrying amount of Machine 650,000
Fair Value 450,000
Cost to Sell 6% of fair value
Value in use 615,000

Recoverable amount would be:

a) Rs 650,000
b) Rs 615,000
c) Rs 423,000
d) Rs 192,000

Question 2
Which of the following are not fair value:

1. Offer price quoted by Seller

2. Bid price quoted by buyer
3. Value of similar assets
4. Forced Sales Value

a) All of above
b) 2, 3 and 4
c) 1, 3 and 4
d) 2 and 4

Question 3
What definition is appropriate for Financial Reporting:

a) Simplifying the accounting results to make it understandable to non accountants

b) Preparation and posting of journal entries in the accounting system
c) accounting for complex transactions
d) Preparing long essay type reports for tax investigation

Question 4
Furniture purchased for an outlet which is expected to last 4 years giving uniform economic
benefits throughout useful life is:
a) An asset not to be depreciated
b) An asset that should be subjected to straight line method of depreciation
c) An Asset subject to depreciation using diminishing balance method
d) Should be expensed out on first day of acquisition
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Question 5

Cost of Asset (Plant) 345,000

Accumulated depreciation - 138,000
Carrying amount 207,000

Fair Value - Cost to Sell 310,000

Value in use 202,000

Which statement is correct:

a) Asset is impaired by Rs 5,000

b) Asset is impaired by Rs 103,000
c) Asset is not impaired at all
d) Income of Rs 103,000 to be booked

Correct Answers

Solution 1

Fair Value 450,000

Cost to Sell - 27,000 6% of FV
FV - Cost to sell 423,000
Value in use 615,000

Recoverable amount 615,000

Higher of 2
Option b) is correct

Solution 2

Fair Value is the bid price quoted by the market participant quoted for an asset. All
other measures are not fair values.

Correct option is c)

Solution 3

Financial reporting is simplifying the accounting results to make it understandable to

non accountants

Option a) is correct
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Solution 4
An asset which is expected to provide uniform economic benefits should be subjected
to straight line method of depreciation

Option b) is correct

Solution 5

Cost of Asset (Plant) 345,000

Accumulated depreciation - 138,000
Carrying amount 207,000

Fair Value - Cost to Sell 310,000

Value in use 202,000
Recoverable amount (higher) 310,000

Conclusion: Asset is not impaired

Option c) is correct
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Question 1
Assume you are the financial analyst at Astra Ltd. You are tasked with performing an impairment review on
a plant at the end of the fiscal year. The following data is available:

Carrying Amount of Plant: Rs 300,000

Fair Value Less Cost to Sell: Rs 280,000

Future Cash Flows from the Use of Asset:

Year 1: Rs 80,000 80,000 76,190
Year 2: Rs 75,000 75,000 68,027
Year 3: Rs 70,000 70,000 60,469
Year 4: Rs 60,000 80,000 65,816
Cash Flows on Disposal of Asset: Rs 20,000 270,503

Discount Rate: 5%

Required: Identify if the plant is impaired and, if so, calculate the amount of impairment.

Solution:
1. Calculate the Value in Use:
First, we need to calculate the present value of the future cash flows, including the cash flows on disposal.
Value in Use=80,000/(1+0.05)1+75,000/(1+0.05)2+70,000/(1+0.05)3+60,000/(1+0.05)4+20,000/(1+0.05)4
Value in Use=76,190.48+68,027.21+60,262.36+50,270.45+16,756.82
Value in use: Rs 270,503

2. Determine the Recoverable Amount:

The recoverable amount is the higher of the fair value less cost to sell and the value in use.
Recoverable Amount Higher of Rs 280,000 and Rs 271,507.32 = Rs 280,000

3. Calculate the Impairment Loss:

Impairment loss is calculated as the difference between the carrying amount and the
recoverable amount.

impairment Loss = 300,000 - 280,000 = Rs 20,000

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Question 2

Susan Limited has reviewed its only plant for impairment at 31 December 2020 and at 31
December 2021. Data is as under:

Carrying amount at 31 December 2020 Rs 800,000

Remaining useful life on 31 Dec 2020 5 Years

Fair Value less cost to sell:

At 31 December 2020 745,000
At 31 December 2021 655,000

Expected cash Flows for value in use:

At the end of 31 December 2020

Year Expected cash Flows

2020 350,000
2021 300,000
2022 260,000
2023 250,000
2024 220,000

Expected cash flows changed in 2021 due to change in economic scenario:

At the end of 31 December 2021

Year Expected cash Flows

2021 275,000
2022 228,750
2023 185,000
2024 170,000

Discount rate is 16%.

Required
Calculate impairment loss (if any) on 31 December 2020 and 31 December 2021
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Solution 31 December
2020 2021
Carrying amount 800,000 640,000
Recoverable Amount 934,062 619,479
Impairment Loss Nil - 20,521

Recoverable amount at 31 December 2020

Fair Value less cost to sell 745,000

Value in use
Year Cash Flows PV at 16%
1 350,000 301,724
2 300,000 222,949
3 260,000 166,571
4 250,000 138,073
5 220,000 104,745
934,062
Recoverable amount higher of (FV-CTS and VIU) 934,062

Recoverable amount at 31 December 2021

Fair Value less cost to sell 600,000

Value in use
Year Cash Flows PV at 16%
1 275,000 237,069
2 228,750 169,999
3 185,000 118,522
4 170,000 93,889
619,479
Recoverable amount higher of (FV-CTS and VIU) 619,479
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Question 1
Dossier Limited is engaged in the production of USB drives for the last two years. The
company acquired a plant at the inception of the business (1 Jan 2020) costing Rs
960,000 with a useful life of 6 years.

The company is considering to initiate an impairment review at 31 December

2021 for its only plant. Details are as under:

Current Fair value 600,000

Cost to sell 47,100

Cash Flows expected from the plant

Annual Sales 605,000

Less
Annual variable Cost (272,250)
Annual operating cost (75,625)
Commission (30,250)
Interest payments (4,000)
Repairs and Maintenance (18,150)
Profit before tax 204,725
Tax payment 25% (51,181)
Net Profit after tax 153,544

Annual net cash flows will reduce by 5% in all remaining years of useful life.
Discount rate applicable to the company is 12%.

Required
Calculate impairment (if any)

Solution

Cost of plant at 1 Jan 2020 960,000

Depreciation for 2020 (160,000)
Depreciation for 2021 (160,000)
Carrying amount 31 Dec 2021 640,000
Recoverable amount 592,247
Impairment (47,753)

Recoverable Amount

Fair value - cost to sell 552,900

Value in use
0 1 2 3 4
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Annual Sales 605,000

Less
Annual variable Cost (272,250)
Annual operating cost (75,625)
Commission (30,250)
Repairs and Maintenance (18,150)
Net Cash Flows 208,725 198,289 188,374 178,956
reduced by 5% every year

PV at 12% 186,362 158,075 134,081 113,730

PV at 12% 592,247

Question 2

Following are the net cash flows (inflows - outflows) expected from the use of asset:

Year Net Cash Flows

1 250,000
2 215,000
3 206,000
4 180,000
5 165,000
Outflows include
Year Interest Income Tax
1 24,000 30,000
2 20,000 25,800
3 23,000 24,720
4 32,000 21,600
5 34,500 19,800

Discount rate is 6%.

Required
Calculate value in use

Solution
1 2 3 4 5
Net Inflows 250,000 215,000 206,000 180,000 165,000
Addback
Interest 24,000 20,000 23,000 32,000 34,500
Tax 30,000 25,800 24,720 21,600 19,800
Net Cash Flows 304,000 260,800 253,720 233,600 219,300
PV at 6% 286,792 232,111 213,028 185,033 163,874
Value in Use 1,080,839
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Question

Following calculations are performed by Subhan Limited's Chief Accountant with respect to a
plant's value in use at 31 December 2021:

1 2 3 4
Sales - in current condition 450,000 495,000 534,600 577,368
Additional sales after overhauling 186,000 210,000
Production cost (180,000) (198,000) (213,840) (230,947)
Production cost for add sales (74,400) (84,000)
Operating Cost (56,250) (61,875) (66,825) (72,171)
Repairs and maintenance (22,500) (24,750) (26,730) (28,868)
Interest on loans (12,400) (13,020) (14,000) (16,850)
Overhauling cost (125,995)
Profit before tax 178,850 71,360 324,805 354,531
Tax at 25% (44,713) (17,840) (81,201) (88,633)
Profit after tax 134,138 53,520 243,604 265,899
PV at 5% 127,750 48,544 210,434 218,755
Value in use 605,484

Required
Recalculate Value in use

Correct Value in use

1 2 3 4
Sales - in current condition 450,000 495,000 534,600 577,368
Additional sales after overhauling 186,000 210,000
Production cost (180,000) (198,000) (213,840) (230,947)
Production cost for add sales (74,400) (84,000)
Operating Cost (56,250) (61,875) (66,825) (72,171)
Repairs and maintenance (22,500) (24,750) (26,730) (28,868)
Interest on loans (12,400) (13,020) (14,000) (16,850)
Overhauling cost (125,995)
Profit before tax 178,850 71,360 324,805 354,531
Tax at 25% (44,713) (17,840) (81,201) (88,633)
Profit after tax 134,138 53,520 243,604 265,899
PV at 5% 127,750 48,544 210,434 218,755
Value in use 605,484
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Question 4

Keyboard Limited is acquired a plant on 1 Jan 2016 costing Rs 300,000. Useful life of the plant
was determined to be 5 years. Expected residual value at the end of useful life is determined to
be Rs 50,000. The plant was subjected to produce TV remotes for "Sangsang" company. The
market of remotes was very promising initially. On 1 January 2017 the chief accountant was
informed that the sales of remotes are expected to go down significantly as Mobile Apps are now
developed to cater for the need.

Following are the estimates of cash flows for the remainder of the life:

1 Useful life is now considered to be 4 years in total

2 Sales for the next year would be Rs 140,000 and thereafter it is expected to go down
by 10% for the next 2 years
3 Variable production cost amounted to Rs 40,500 which is expected to move inline
with sales
4 Fixed annual production cost amounted to Rs 20,600 which is expected to inflate at
5% per anum.
5 The company pays Rs 10,600 interest on its loans obtained for the acquisition of asset
and other avenues.
6 Income tax is paid by the company at 25% p.a.
7 Residual value at the end of revised useful life is Rs 60,800.
8 Discount rate applicable to the company is 12%.
9 Fair value less cost to sell at 31 December 2016 is Rs 140,600.

Required
Calculate impairment (if any)

Solution

Impairment Loss

Carrying Amount 250,000

Recoverable Amount 209,068
Impairment (40,932)

Carrying amount
Cost 300,000
Depreciation 2016 (300k-50k)/5 (50,000)
250,000

Recoverable Amount

FV-CTS 140,600
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Value in use

1 2 3
Sales (10% decr) 140,000 126,000 113,400
Variable Cost (10% decr) (40,500) (36,450) (32,805)
Fixed Cost (5% Incr) (20,600) (21,630) (22,712)
Residual Value 60,800
Net Cash Flows 78,900 67,920 118,684
PV at 12% 70,446 54,145 84,477
Value in use 209,068
Question

Carrying amount of a plant 780,000

FV-CTS at 31 December 2021 705,000

Cash Flows for value in use

Annual Sales 420,000

Material and Labour cost 98,000
Overheads 63,000
Commission to distributor 16,800
Repair and maintennace 10,500

Remaining life 4 Years

Discount rate 12.50%

Required
Calculate impairment (if any) on 31 December 2021
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Question

Taiwan Limited owns a plant (Carrying Amount Rs 500,000) which is subjected to impairment review on
1 Jan 2021. Following are the details:

1 Remaining useful life of the plant is 4 Years

2 Annual Sales (units and price) in the current status of the asset are:

Year Units Price

2022 14,000 20
2023 16,000 21
2024 12,000 20
2025 8,000 18

3 Variable cost per unit would be Rs 8 for units below 13,000 units and Rs 7 for units above 13,000
units.
4 Fixed production and operating cost for the year 2022 Rs 21,000 and thereafter it would increase
by 10% per year.
5 The company is planning to incorporate a turbo unit into plant at the end of 2023 at a cost of Rs
140,000
6 The installation of turbo unit will increase the sales by 8,000 in 2024 and 6,000 units in 2023.
7 Residual value is expected to be nil but if the asset is overhauled its residual value would be Rs
160,000 at the end 2025
8 Annual interest payments are expected to range from Rs 40,000 each for 2022 and 2023 and Rs
34,000 for 2024 and 2025
9 Fair Value of the asset now is determined to be Rs 400,000 and cost to sell it would be 7% of fair
value
9 Discount rate applicable to the company is 9% pre-tax
10 Tax is payable on net income from the plant at 30% p.a.

Required
Calculate impairment (if any) on 1 Jan 2022

Solution

Carrying Amount 500,000

Recoverable Amount 422,378
Impairment (77,622)

Recoverable Amount

a) Fair Value less cost to sell

Fair Value 400,000

Cost to Sell (28,000)
FV-CTS 372,000
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Value in use

1 2 3 4
Sales (Units x Price) 280,000 336,000 240,000 144,000
Variable Cost (working 1) (111,000) (125,000) (96,000) (64,000)
Fixed Cost (10% inflation) (21,000) (23,100) (25,410) (27,951)
Residual Value 0
Net Annual Cash Flows 148,000 187,900 118,590 52,049
PV @9% 135,780 158,152 91,573 36,873
Value in use 422,378

Working for Variable cost

Sales / Produced units 14,000 16,000 12,000 8,000
Upto 13,000 unit 13,000 13,000 12,000 8,000
Beyond 13,000 1,000 3,000 0 0

Variable Cost upto 13,000 104,000 104,000 96,000 64,000

Beyond 13,000 units 7,000 21,000 0 0
111,000 125,000 96,000 64,000
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Question 1

Following are the net cash flows calculated by Rhodes Limited at 31 December 2020:
1 2 3 4 5
Actual ---------------Estimated----------
2020 2021 2022 2023 2024
Net Inflows 45,000 42,000 11,000 32,000 25,000
PV at 8.75% 41,379 35,513 8,553 22,879 16,436
Value in use 124,760

Following are the issues identified by auditor while reviewing the detailed working:

1 Interest of Rs 6,000 is treated as an outflow in all five years

2 Tax on profits is deducted at 30% of the profit

Year Profits
2020 15,000
2021 10,500
2022 6,000
2023 5,200
2024 1,200
3 Overhauling cost of Rs 25,000 is deducted in 2022
4 Annual inflows of Rs 40,000 for the next two years due to overhauling is not incorporated.
5 Pre-tax rate of interest is 12.5% whereas post tax rate is 8.75%
6 Annual depreciation of Rs 24,000 is deducted from the cash flows
7 Cash inflows of 2021 contains an amount of Rs 2,000 for which receivable was recognized in 2020
8 A payable of Rs 1,320 pertaining to year 2020 is shown as payment in 2022

Required
Recalculate value in use at 31 December 2020

Solution 1 2 3 4
2021 2022 2023 2024
Net Inflows 42,000 11,000 32,000 25,000
Addback Interest 6,000 6,000 6,000 6,000
Addback Income Tax 3,150 1,800 1,560 360
Addback Overhauling - 25,000 - -
Addback Depreciation 24,000 24,000 24,000 24,000
Reverse cash inflows (2,000) - - -
Payable reverse - 1,320 -
Net Corrected cash flow 73,150 69,120 63,560 55,360
PV at 12.5% 65,022 54,613 44,640 34,561
Value in use 198,837
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Question
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Question 1

Usman Limited acquired a machine on 1 Jan 2016. Details of the costs are
as under:
----Rs----
Purchase price 600,000
Installation Cost 60,000
Dismantling Cost 50,500

Dismantling Cost shall be paid in 4 years (end of useful life)

Discount rate appliable to the company is 6%.

Required
Journal Entries for the year ended 31 December 2016,2017,2018 and 2019

Question 2

From the following information about the next year (2021), calculate value in use for
an asset:
31 Dec 2021
Sales 650,000
Cost of Production 260,000
Selling Cost 25,000
Collection from past receivables 12,500
Payment against past payables 7,800
Proposed upgradation cost 350,000
Additional inflows due to overhauling 125,000
Maintenance Cost 32,000
Interest on finance for operations 34,500
Tax charges 16,500

Relevant cash flows will increase by 6% in 2022, 0% in 2023 and will reduce
by 10% in 2024. Useful life of the asset us 4 years and thereafter the asset
shall be disposed at Rs 100,000. Applicable discount rate shall be 10%

Required
Calculate value in use for the asset.
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Solution 1

Cost of the asset

Purchase price 600,000

Installation Cost 60,000
PV of dismantling Cost 40,000
Gross Cost 700,000
Annual Depreciation 175,000

Schedule for Dismantling Cost

Yr Opening Increase Closing

2016 40,000 2,400 42,400
2017 42,400 2,544 44,944
2018 44,944 2,697 47,640
2019 47,640 2,859 50,500

Journal Entries

1 Jan 2016
Property, plant and Equip 700,000
Cash 660,000
Provision for DC 40,000

31 Dec 2016
Depreciation Expense 175,000
Allowance for Depre 175,000

31 Dec 2016
Interest Expense 2,400
Provision for DC 2,400

31 Dec 2017
Depreciation Expense 175,000
Allowance for Depre 175,000
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31 Dec 2017
Interest Expense 2,544
Provision for DC 2,544

31 Dec 2018
Depreciation Expense 175,000
Allowance for Depre 175,000

31 Dec 2018
Interest Expense 2,697
Provision for DC 2,697

31 Dec 2019
Depreciation Expense 175,000
Allowance for Depre 175,000

31 Dec 2019
Interest Expense 2,859
Provision for DC 2,859

31 Dec 2019
Provision for DC 50,500
Cash 50,500

Solution 2
-----------------31 December--------------
2021 2022 2023 2024
Sales 650,000
Cost of Production (260,000)
Selling Cost (25,000)
Maintenance Cost (32,000)
Residual Value 100,000
Net Cash 333,000 352,980 352,980 417,682
6% increase 0% increase (352,980x90%+100,000)

PV at 10% 302,727 291,719 265,199 285,282

Value in Use 1,144,928
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Question 1
Following is the extracts from the trail balance of Jamal And Company at 1 Jan 2009:

Cost Acc Depr

Molding Machine 125,000 42,800
Can Cutter 450,000 164,700
Total useful life 10 Years 5 Years

The company subjected both the assets to an impairment review at 31 December

2009:
Molding
Machine Can Cutter
Cash inflows per year 14,000 180,000
Cash outflows per year (4,500) (54,500)

In outflows of molding machine an expected outflow of Rs 12,450 is ignored against

overhauling which is planned in 2 years time Inflows as a result of such overhauling
are also ignored

Outflows include Tax

Rs 800 per annum for Molding machine
Rs 2000 per annum for Can cutter

2.5% of the outflows (total outflow) represent finance cost

Fair Value of Now At life end

Molding Machine 40,000 19,000
Can Cutter 210,500 45,000

Cost to Sell of Now At life end

Molding Machine 2,500 1,000
Can Cutter 16,500 6,750

Discount rate applicable to the company and asstes is 9%

Required
Calculate impairment (if any) in both assets
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Solution
Cost of the asset 125,000 450,000
Residual Value (18,000) (38,250)
107,000 411,750
Accum Depr 42,800 164,700
Life gone 40% 40%
Total Life 10 5
Life gone 4.00 2.00
Life Left at start 6.00 3.00
Life left at year end 5.00 2.00

Carrying Amount at 31 Dec

Carrying Amount at 1 Jan 82,200 285,300 net of Accum Depr
Depriciation (10,700) (82,350)
71,500 202,950
Cuurent FV - CTS
Fair Value 40,000 210,500
CTS (2,500) (16,500)
37,500 194,000
Value in Use
Molding Machine
1 2 3 4 5
Annaul net inflow 9,500 9,500 9,500 9,500 9,500
Tax addback 800 800 800 800 800
Intr Add back (238) (238) (238) (238) (238)
Net RV 18,000
10,063 10,063 10,063 10,063 28,063
VIU 9,232 8,469 7,770 7,129 18,239
VIU 50,838

Can Cutter
1 2
Annaul net inflow 125,500 125,500
Tax addback 2,000 2,000
Intr Add back (3,138) (2,745)
Net RV 38,250
124,363 163,005
VIU 114,094 137,198
VIU 251,292

Recoverable Amount Molding Can Cutter

FV - CTS 37,500 194,000
VIU 50,838 251,292

Recoverable Amount 50,838 194,000

Carrying amount (71,500) (202,950)
Impairment Loss (20,662) (8,950)