5.3 Impairment and Disposal of Long-Lived Assets Flashcards
Blake Corporation has determined that one of its machines has experienced an impairment in value. However, the company expects to continue to use the asset for another 3 full years because no active market exists for this machine. Selected information on the impaired asset (on the date that impairment was determined to exist) is provided below.
Original cost of the machine: $22,000
Carrying amount of the machine: 20,000
Undiscounted future cash flows expected to be generated by the machine: 15,000
Fair value of the machine (determined by calculating the present value of the future cash flows expected to be generated by the machine): 12,000
After recognition of the impairment loss, Blake’s carrying amount of the impaired asset will be
A. $0
B. $14,000
C. $15,000
D. $12,000
D. $12,000
A long-lived asset (asset group) is impaired when its carrying amount is greater than its fair value. However, a loss equal to this excess is recognized for the impairment only when the carrying amount is not recoverable. The carrying amount is not recoverable when it exceeds the sum of the undiscounted cash flows expected from the use and disposition of the asset (asset group).
The asset is impaired because its carrying amount ($20,000) exceeds its fair value ($12,000). This loss ($20,000 – $12,000 = $8,000) is recognized in full because the carrying amount ($20,000) exceeds the undiscounted cash flows from the asset ($15,000). Thus, the carrying amount is reduced to $12,000.
