M 8 Impairment

Hudson Corp. operates several factories that manufacture medical equipment. The factories have a historical cost of $200 million. Near the end of the company's fiscal year, a change in business climate related to a competitor's innovative products indicated to Hudson's management that the $170 million carrying amount of the assets of one of Hudson's factories may not be recoverable. Management identified cash flows from this factory and estimated that the undiscounted future cash flows over the remaining useful life of the factory would be $150 million. The fair value of the factory's assets is reliably estimated to be $135 million. The change in business climate requires investigation of possible impairment. Which of the following amounts is the impairment loss?

$35 million1 70M-135M = 35M A fixed asset is first tested for impairment, if the sum of the undiscounted future cash flows is less than the carrying amount, a impairment loss needs to be recognized.

On December 31, an entity analyzed a patent with a net carrying value of $500,000 for impairment. The entity determined the following: Fair value $ 495,000 Undiscounted future cash flows 515,000 What is the impairment loss that will be reported on the December 31 income statement under U.S. GAAP?

0 In this situation, the carrying value of 500,000 is less than the undiscounted future cash flows of 515,000 so no impairment loss is recorded.

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? A. $0 B. $10,000 C. $30,000 D. $20,000

0. There will be no amount recorded because a subsequent reversal of an impairment loss is prohibited under US GAAP.

On Jan 2 Y1, Reed Co purchased a machine for $800000 and established an annual depreciation charge of $100000 over an 8 yr life. During Y4, after issuing Y3 financial statments, Reed concluded that-the machine suffered permanent impairment of its operation value-$200000 is a reasonable estimate of the amount expected to be recovered through use from 1/1/Y4 to 12/31/Y8. In Reed's Dec 31 Y4 balance sheet, the machine should be reported at a carrying amount of:

$160,000 When a permanent impairment has occurred, the book value is reduced with a credit to accumulated depreciation. $200K is now depreciated over 5 yrs at $40K/yr.200 - 40 = 160

On January 1, year 1, a company capitalized $100,000 of costs for software that is to be sold. The company amortizes the software costs on a straight-line basis over five years. The carrying value of the software costs on January 1, year 3, was $60,000. As of December 31, year 3, the estimated future gross revenue to be generated from the sale of the software is $23,000, and the estimated future cost of disposing of the software is $8,000. What amount should the company expense related to the software costs for the year ended December 31, year 3? $18,400 $20,000 $37,000 $45,000

1. 20,0000 in amortization expense (based on 100k depreciated over five years) 2. 25,000 in impairment loss (based on carrying value of 40,000 at the end of Year 3 -15,000 (Gross Revenue 23,000 - cost of disposal 8,000.) 20000+25000 = 45000

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?

250,000 cost depreciated at 25,000 per year using straight-line method based on a 10-year life. After 4 years, the accum depr would be 100,000. The Net Book Value would be 250,000 - 100,000 = 150,000 Impairment loss of 30,000 so 120,000. (150,000 - 30,000) 120,000 / 6 years =20,000 per year.

which of the following is an intangible asset that is subject to the recoverability test when testing for impairment?

A Patent

A company reported $6 million of goodwill in last year's statement of financial position. How should the company account for the reported goodwill in the current year? A. Determine whether fair value of the reporting unit is less than the carrying amount and report an impairment loss on goodwill in the income statement. B. Determine the current year's amortizable amount and report the current years amortization expense. C. Determine whether the fair value of the reporting unit is greater than the carrying amount and report the recovery of any previous impairment in the income statement. D. Determine whether the fair value of the reporting unit is greater than the carrying amount and report a gain on goodwill in the income statement.

A. Determine whether fair value of the reporting unit is less than the carrying amount and report an impairment loss on goodwill in the income statement.

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

A. When events or changes in circumstances indicate that its carrying amount may not be recoverable

After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Which of the following statements about subsequent reversal of a previously recognized impairment loss is correct? A. It must be disclosed in the notes to the financial statements. B. It is encouraged, but not required. C. It is required when the reversal is considered permanent. D. It is prohibited.

D. It is prohibited.

Which of the following is a pair of values that are compared to determine the amount of a possible impairment loss on an intangible asset, with an indefinite life, other than goodwill?

Fair value, carrying value

Which of the following statements concerning the impairment of fixed assets under U.S. GAAP is true? I. Impairment losses are shown on the income statement net of tax. II. The test for recoverability compares the present value of all expected future cash flows produced by the fixed asset to its carrying value. III. To determine the amount of any impairment loss, fair value must be used.

III. To determine the amount of any impairment loss, fair value must be used.

A company has experienced operating losses from its appliances division for the past five years. The division is the lowest level of identifiable cash flows. Having determined the division is the lowest level of identifiable cash flows, the company's next step in performing its impairment test is to

Perform a recoverability test on the carrying amount of the division's assets.

Which of the following conditions must exist in order for an impairment loss to be recognized under U.S. GAAP? 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. a.II only. b.Both I and II. c.Neither I nor II. d.I only.

a. II only. A long-lived asset is impaired if the carrying amount of the asset is greater than, not less than, its fair value and if that carrying amount is not recoverable.

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? A. $15,000 B. $0 C. $20,000 D. $5,000

B. $0