Test II Multiple Choice Flashcards
Credit losses would be correctly be calculated as the difference between the amortized cost of debt and:
a. current cash flows multiplied by the expected future discount rate.
b. expected future cash flows multiplied by the expected future discount rate.
c. expected future cash flows multiplied by the effective interest rate that existed when the investment was acquired.
d. current cash flows multiplied by the effective interest rate the existed when the investment was acquired.
c. expected future cash flows multiplied by the effective interest rate that existed when the investment was acquired.
Credit losses capture declines in customer’s credit quality that have occurred since the investment was ACQUIRED.
Which of the following is NOT a reason why an investor might record at least some amount of credit loss from an AFS investment in net income?
a. the investor intends to sell the investment.
b. the investor believes it is “more likely than not” that the investor will be required to sell the investment prior to recovering the amortized cost of the investment less any credit losses arising in the current year.
c. the investor determines that a credit loss exists on the investment.
d. the investor believes it is “more likely than not” that there is a non credit loss on the investment.
d. the investor believes it is “more likely than not” that there is a non credit loss on the investment.
There is no “more likely than not” credit loss criterion.
An impairment loss has the effect of:
a. decreasing total assets
b. decreasing net income
c. decreasing retained earnings
d. all of the above
d. all of the above
An impairment loss is typically recorded by reducing accumulated depreciation to zero and decreasing the asset’s recorded amount to fair value. Both of these adjustments reduce total assets. In addition, an impairment loss is reported in the income statement, reducing the company’s reported net income and therefore retained earnings.
Which of the following approaches CANNOT be used to determine the fair value of an impaired asset?
a. prices of similar assets
b. the market price of the asset
c. the sum of the discounted expected future cash flows
d. the sum of the undiscounted expected cash flows
d. the sum of the undiscounted expected cash flows
Undiscounted cash flows do not represent fair value as the measure ignores the time value of money.
A company reports the following information at year-end:
Building: BV = $500,000, EFCF’s = $380,000, FV = $360,000
Patent: BV = $35,000, EFCF’s = $40,000, FV = $38,000
Copyright: BV = $40,000, EFCF’s = $38,000, FV = $39,000
Machine: BV = $100,000, EFCF’s = $120,000, FV = $85,000
Based on the above information, what is the total amount of impairment loss that the company should record at year end?
a. $141,000
b. $126,000
c. $123,000
d. $122,000
a. $141,000
Impairment = EFCF’s < BV
Building: YES
Patent: NO
Copyright: YES
Machine: NO
Impairment loss = BV - FV
Building: 500,000 - 360,000 = 140,000
Copyright: 40,000 - 39,000 = 1,000
Total impairment loss = $141,0000
The difference in testing for impairment of a finite-life versus indefinite life intangible asset is:
a. the measure of an impairment loss of an indefinite life intangible asset is not based on book value.
b. subsequent recovery of an impairment loss is allowed for a finite life intangible asset.
c. the cash flow recoverability test is omitted for an indefinite life intangible asset.
d. companies are not required to recognized impairment losses on finite life intangible assets.
c. the cash flow recoverability test is omitted for an indefinite life intangible asset.
Declarmen Company owns a factory in the United Kingdom. A change in business climate indicates that Declarmen should investigate for possible impairment. Below is data that related to the factory’s assets ($ in millions):
Book value: $570
Undiscounted sum of future estimated cash flows: $630
Present value of future cash flows: $525
Fair value less cost to sell (determined by appraisal): $540
The amount of impairment loss that Declarmen should recognize according to US GAAP is:
a. $0
b. $30 million
c. $60 million
d. $45 million
a. $0
Step 1 of the impairment test is to see if EFCFs < BV
630 < 570, no impairment.
Declarmen Company owns a factory in the United Kingdom. A change in business climate indicates that Declarmen should investigate for possible impairment. Below is data that related to the factory’s assets ($ in millions):
Book value: $570
Undiscounted sum of future estimated cash flows: $630
Present value of future cash flows: $525
Fair value less cost to sell (determined by appraisal): $540
The amount of impairment loss that Declarmen should recognize according to IFRSP is:
a. $0
b. $30 million
c. $60 million
d. $45 million
b. $30 million
Under IFRS, the impairment equals book value ($570) less the greater of (a) present value of future cash flows of $525 and (b) fair value less cost to sell of $540. Impairment loss = $570 − $540 = $30.
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If the fair value of a HTM investment declines below cost, and the company believes it may eventually need to sell the investment before fair value recovers:
a. the investment is not written down to fair value, but any credit losses are recognized in net income.
b. the investment is written down to fair value, and the entire impairment loss is recognized in net income.
c. the investment is written down to fair value, and the entire impairment loss is recognized in other comprehensive income.
d. credit losses and other changes in fair value are not recognized for held to maturity investments.
a. the investment is not written down to fair value, but any credit losses are recognized in net income.
If the fair value of an AFS investments
