Il RM
Il RM
Il RM
The Midnight Sky Corp. is assessing one of its factories for impairment as of December 31, 2021 due to a
competitor launching a more superior product rivaling the product line being produced by the factory.
The factory produces one of the company’s product line and is considered a separate cash generating
unit from the rest of its other factories producing other product lines. The assets in the factory included
the Land (Cost: P1M); Building (Cost: P6M) and an Equipment (ABC) (Cost: P2M) which were acquired in
January of 2018 (when the product line has been launched). Another Equipment (DEF) (Cost: P3M) was
acquired in January of 2020 (when the product line was expanded). The building had a useful life of 20
years while the equipment were estimated to have a useful life of 10 years. Assets are being depreciated
under the straight-line method to zero residual value.
Individual cash flows related to each asset comprising the factory cannot be ascertained thus you
suggested that the company treat the factory as a single cash generating unit for the purpose of applying
PAS 36, Impairment of assets. A cash generating unit as defined by the said standards is the smallest
identifiable group of assets that generates cash inflows that are largely independent of the cash inflows
from other assets or group of assets.
As a result of the introduction of a more superior product by the competitor, the client ascertained that
the product being currently produced by the factory can now only generate cash flows for the company
for the next five years, after which the assets in the factory can be disposed for a total of lump-sum of
P1.4M. The following presents the estimates of the said cash flows (pre-tax):
Requirements:
On December 31, 2021, the machine was appraised as having a gross replacement cost of P2,700,000.
Six Underground Company applies the revaluation model in valuing this class of property, plant, and
equipment after its initial recognition.
Requirements: