Lesson 13

Question 1

What is a write off of long lived assets?

Answer 1

impairments

Question 2

impairments

Answer 2

when the carrying amount of an asset is not recoverable and therefore a write off it needed

Question 3

What are 5 examples that can lead to an impairment?

Answer 3

1. a significant decrease in the fair value of an asset
2. a significant change in the extent or manner in which an asset is used
3. a significant adverse change in legal factors or in the business claim that affects the value of an asset
4. an accumulation of costs significantly in excess of the amount originally expected to acquire or construct an asset
5. a projection or forecast that demonstrates continuing losses associated with an asset.

Question 4

Recoverability test

Answer 4

it is used to determine whether an impairment has occurred.

Question 5

What is the first step in the recoverability test?

Answer 5

a company estimates the future net cash flows expected from the use of that asset and its eventual disposition.
If the sum of the expected future net cash flows (undercounted) is less than the carrying amount of the asset - it is impaired.
If the sum of the expected future net cash flows (undercounted) is equal to or greater than the carrying amount of the asset - it is not impaired.

Question 6

How to determine the value of the Impairment loss

Answer 6

is the amount by which the carrying amount of the asset exceeds its fair value.

Question 7

What is the fair value of an asset?

Answer 7

It is the market price of the asset or the present value of expected future net cash flows.

Question 8

What is the journal entry to record the impairment loss?

Answer 8

Debit - Loss on Impairment
Credit - Accumulated Depreciation - “asset”

Question 9

What 4 things should a company disclose if they recognize an impairment loss?

Answer 9

The asset(s) impaired.
The events leading to the impairment
The amount of the loss
How it determined fair value

Question 10

Why can’t a company restore an impairment loss?

Answer 10

Because it is that the new cost basis puts the impaired asset on an equal basis with other assets that are unimpaired.

Question 11

Can companies depreciate assets that are held for sell or disposal?

Answer 11

No because they “turn” into inventory and companies should report them at the lower of cost or net realizable value.

Question 12

What three things happen when an impaired asset is held for use?

Answer 12

1. impairment loss: excess of carrying amount over fair value
2. depreciate on new cost basis
3. restoration of impairment loss is not permitted

Question 13

What three things happen when an impaired asset is held for disposal?

Answer 13

1. impairment loss: excess of carrying amount over fair value less cost of disposal
2. no depreciation is taken
3. restoration of impairment is permitted.

Question 14

Erie Corporation owns machinery with a book value of $2,200,000. It is estimated that the machinery will generate future cash flows of $1,995,000. The machinery has a fair value of $1,915,000.

To record the impairment loss, what should be included in the journal entry?

Answer 14

An increase in the asset’s Accumulated Depreciation account by $285,000

An impairment is recorded when an asset fails the recoverability test. If the expected future cash flows is less than the carrying amount, the asset is impaired. The amount of the impairment is the fair value of the asset less the book value. If the fair value of the asset is not known, the present value of the expected cash flows can be used to determine the fair value. The journal entry to record the impairment is: Debit Loss on Impairment; Credit Accumulated Depreciation. The expected future cash flows is less than the book value of the asset, therefore, an impairment exists. Since the fair value of the asset is known, Erie Corporation will record an an impairment journal entry of: Debit Loss on Impairment $285,000 (2,200,000 - 1,915,000); Credit Accumulated Depreciation $285,000.

Question 15

Flannery Corporation owns machinery with a book value of $520,000. It is estimated that the machinery will generate future cash flows of $465,000. The machinery has a fair value of $415,000.

Which amount should Florence recognize as a loss on impairment?

Answer 15

$105,000

An impairment is recorded when an asset fails the recoverability test. If the expected future cash flows is less than the carrying amount, the asset is impaired. The amount of the impairment is the fair value of the asset less the book value. If the fair value of the asset is not known, the present value of the expected cash flows can be used to determine the fair value. The journal entry to record the impairment is: Debit Loss on Impairment; Credit Accumulated Depreciation. An impairment exists on this asset since the expected future cash flows is less than the book value of the asset. Since the fair value of the asset is known, Flannery Corporation will record an an impairment journal entry of: Debit Loss on Impairment $105,000 ($520,000 - $415,000); Credit Accumulated Depreciation $105,000.

Question 16

When is the restoration of an impairment loss permitted?

Answer 16

On assets being held for disposal

After recording an impairment loss, the reduced carrying amount of an asset held for use becomes its new cost basis. A company does not change the new cost basis except for depreciation or amortization in future periods or for additional impairments. A company may not restore a previous impaiment on an asset held for use. Assets held for disposal are like inventory; companies should report them at the lower-of-cost-or net realizable value and any losses or gains should be reported as part of income from continuing operations.

Question 17

An asset impairment occurs when the asset’s carrying amount exceeds what amount?

Answer 17

Expected future net cash flows

An impairment is recorded when an asset fails the recoverability test. If the expected future cash flows are less than the carrying amount, the asset is impaired.