FAR 58 - Impairment Flashcards Preview

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Flashcards in FAR 58 - Impairment Deck (27):
1

When should a long-lived asset be tested for recoverability?
A. When external financial statements are being prepared.
B. When events or changes in circumstances indicate that its carrying amount may not be recoverable.
C. When the asset's carrying amount is less than its fair value.
D. When the asset's fair value has decreased, and the decrease is judged to be permanent.

B. Long-lived assets need to be tested for impairment when facts or circumstances indicate that the carrying amount may not be recoverable. An indication that the carrying value is no longer recoverable includes innovations in technology which may make the product or process obsolete.

2

Four years ago on January 2, Randall Co. purchased a long-lived asset. The purchase price of the asset was $250,000, with no salvage value. The estimated useful life of the asset was 10 years. Randall used the straight-line method to calculate depreciation expense. An impairment loss on the asset of $30,000 was recognized on December 31 of the current year. The estimated useful life of the asset at December 31 of the current year did not change. What amount should Randall report as depreciation expense in its income statement for the next year?

$20,000
The net book value of the asset at the time of impairment was $150,000: $250,000 cost less $100,000 accumulated depreciation (4 years of depreciation at $25,000 a year). After the impairment of $30,000, the net book value is $120,000 ($150,000 - 30,000). The remaining life is 6 years and annual depreciation is $20,000.

3

A company has a long-lived asset with a carrying value of $120,000, expected future cash flows of $130,000, present value of expected future cash flows of $100,000, and a market value of $105,000. What amount of impairment loss should be reported?

$0
The recoverable cost (expected future cash flows) of $130,000 exceeds the $120,000 book value. Therefore, the asset is not impaired, and no loss is recorded. Although both the market value and present value of the future cash flows are less than book value, as long as the nominal sum of future cash flows ($130,000) exceeds book value, no impairment is recorded. The firm is expected to recover its book value.

4

Gown, Inc. sold a warehouse and used the proceeds to acquire a new warehouse. The excess of the proceeds over the carrying amount of the warehouse sold should be reported as a(an):
A. Extraordinary gain, net of income taxes.
B. Part of continuing operations.
C. Gain from discontinued operations, net of income taxes.
D. Reduction of the cost of the new warehouse.

B. The excess of proceeds over the carrying value increases the net assets of the firm, is recorded as an ordinary gain, and is included in income from continuing operations. The purchase of the new warehouse is an unrelated transaction.

5

On July 1, 2004, one of Rudd Co.'s delivery vans was destroyed in an accident. On that date, the van's carrying value was $2,500.

On July 15, 2004, Rudd received and recorded a $700 invoice for a new engine installed in the van in May 2004, and another $500 invoice for various repairs. In August, Rudd received $3,500 under its insurance policy on the van, which it plans to use to replace the van.

What amount should Rudd report as gain (loss) on disposal of the van in its 2004 income statement?

$300 The gain of $300 is the difference between the insurance proceeds and the sum of the carrying value of the van plus the cost of the new engine. The repair cost is expensed. It does not increase the value of the van. $300 = $3,500 - $2,500 - $700.

6

Which of the following conditions must exist in order for an impairment loss to be recognized?

I. The carrying amount of the long-lived asset is less than its fair value.
II. The carrying amount of the long-lived asset is not recoverable.

II. only. The test for impairment for an asset in use is whether the carrying value (book value) is less than its recoverable cost. An asset's recoverable cost is the sum of its estimated net cash inflows projected for its remaining life.

When book value > recoverable cost, the carrying value is not recoverable. In other words, the asset is booked at more than the sum of its future net cash inflows.

For example, if an asset's carrying value is $100 and its recoverable cost is $80, then its carrying value is not recoverable (only $80 is recoverable). The AMOUNT of the loss recognized is the difference between carrying value and fair value, but that difference is not used for TESTING whether an asset is impaired.

That difference is not the condition leading to the impairment loss.

7

Last year, Katt Co. reduced the carrying amount of its long-lived assets used in operations from $120,000 to $100,000 in connection with its annual impairment review. During the current year, Katt determined that the fair value of the same assets had increased to $130,000. What amount should Katt record as restoration of previously recognized impairment loss in the current year's financial statements?

$0
Recovery of impairment losses is prohibited under U.S. GAAP.

8

Restorations of carrying value for long-lived assets are permitted if an asset's fair value increases subsequent to recording an impairment loss for which of the following?
Held for use
Held for disposal

No, yes
If an asset is held for disposal, previous losses can be recovered. The logic is that the recovery will be realized in the near future if the asset is in the process of being disposed. In contrast, an asset held for use CANNOT recover previous impairment because there is no certainty regarding the ultimate realization of those losses.

9

T/F: An impairment loss is reported as part of income from continuing operations.

True

10

T/F: The recorded amount of an impairment loss for an asset in use is book value less fair value.

True

11

T/F: For the purposes of determining whether an impairment loss has occurred assets in use must be grouped by similar function.

False.
For purposes of the test for impairment, assets are grouped at the lowest possible organizational level at which cash flows can be identified. The 3 amounts (BV, FV, RC) are measured at this level. One intended effect of this rule on grouping at the LOWEST level rather than a higher one is to decrease the incidence of merging assets with impairment losses with those for which FV > BV in which case there would be fewer or no impairment losses recognized.

12

T/F: An asset is held for disposal. Its original cost is $100,000, and $78,000 of depreciation has been recognized. The asset's fair value is $15,000, and estimated costs to sell the asset are $2,000. The amount of impairment loss to be recorded is $9,000.

True

13

T/F: The fair value of an asset in use is less than its book value. The recoverable cost of the asset is also less than its book value. Therefore, the impairment loss to be recognized is book value less fair value.

True

14

T/F: The recoverable cost of an asset is less than its book value. Therefore, an impairment loss should be recorded.

True

15

T/F: For purposes of determining whether an impairment for an asset in use has occurred, recoverable cost is present value of net future cash flows from use and disposal of an asset.

False.
Is the sum of expected future net cash inflows from use and ultimate disposal. Not a discounted amount.

16

T/F: An impairment for an asset in use has occurred when recoverable cost is less than fair value.

False.
When recoverable cost is less than book value.

17

T/F: The recoverable cost of an asset exceeds its fair value. Therefore, an impairment loss could not be warranted.

False.
Recoverable costs always exceeds FV because it is not a discounted amount. This alone does not warrant an impairment loss. The recoverable cost being less than book value is what would warrant the impairment loss.

18

T/F: An asset held for disposal, and which has been written down to fair value less cost to sell, can be increased in value if the fair value increases.

True

19

T/F: The two amounts used to test whether an impairment loss has occurred are the same two used to measure the loss.

False.
Recoverable cost and book value are used to determine impairment.
Fair value and book value are used to measure the impairment loss.

20

T/F: After an asset held for disposal is written down due to an impairment loss, the new book value is fair value less cost to sell.

True

21

T/F: An asset held for disposal is written down and an impairment loss recognized in period 1. In period 2, the fair value of the asset increased above the book value at the time the impairment loss was recognized. There was no change in the estimated costs to sell. The asset has not been sold as of the end of period 2. The book value of the asset at the end of period 2 is the book value immediately preceding the recognition of the impairment loss.

True

22

Restoration of the carrying value of a long-lived asset is permitted under IFRS if the asset's fair value increases subsequent to recording an impairment loss for which of the following?
Held for use
Held for disposal

Yes, yes
Under IFRS the impairment loss can be recovered if the asset is held for use or disposal.

23

Under IFRS the test for asset impairment is to compare the carrying value of the asset to its recoverable amount. Which of the following is the recoverable amount according to IFRS?
A. The greater of future undiscounted cash flows or future discounted cash flows.
B. The greater of future discounted cash flows or fair value.
C. The greater of fair value less cost to sell or value in use.
D. The greater of fair value or value in use.

C. The greater of fair value less cost to sell or value in use is the recoverable amount according to IFRS.

24

A company has a long-lived asset with a carrying value of $120,000, expected future cash flows of $130,000, present value of expected future cash flows of $100,000, and a market value of $105,000. Under IFRS what amount of impairment loss should be reported?

$15,000
This response is the difference between carrying value and recoverable amount. According to IFRS the recoverable amount is the greater of fair value less cost to sell ($105,000) or value in use ($100,000). Value in use is the discounted cash flows. Therefore, this asset is has an impairment of $15,000 because the recoverable amount is $105,000 and the carrying value is $120,000.

25

T/F: Under IFRS, impairment testing is done at a cash generating level.

True

26

T/F: Under IFRS, impairment testing is a one step process.

True.
Recoverable amount is the higher of:
* Fair value less cost to sell OR
* Value in use

27

T/F: Under IFRS, impairment compares the carrying value to the greater of net selling price (market value less disposal) or value in use (discounted cash flows).

True

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