unit 5 - Impairment of Assets

Problem 6

2. (b) The undiscounted expected future cash flows ($300,000) are less than the
carrying amount of the equipment ($350,000).
Thus, the equipment is determined to be impaired. The impairment loss is calculated
as follows:
Carrying value - 12/31/Y4 $350,000 Fair value - 12/31/Y4 250,000 Impairment loss
reported on year 4 income statement $100,000

3. (b) A long-lived asset is considered impaired if the future cash flows expected
to result from the use of the asset and
its eventual disposition are less than the carrying amount of the asset. If deemed
impaired, the asset�s carrying value is
reduced to fair value and a loss on impairment is recognized for the difference
(Carrying value � Fair value).
In this case, the asset is not impaired, as the net cash inflows of $175,000 are
greater than the 8/31/Y4 carrying amount (book value) of $170,000.
Therefore, the carrying amount of the asset ($170,000) remains unchanged.

4. (a) The undiscounted expected future cash flows ($175,000) are less than the
carrying amount of the equipment ($200,000).
Therefore, the equipment is deemed impaired. The impairment loss is calculated in
the following way:
Carrying amount of the equipment on December 31, year 4 $200,000 Fair value of the
equipment on December 31, year 4 125,000
Impairment loss reported on year 4 income statement $ 75,000

5. (b) After an impairment loss is recognized, the reduced carrying amount of the
asset shall be accounted for as its new cost.
This new cost (the fair value of the asset at the date of impairment, or $135,000)
shall be depreciated over the asset�s remaining useful life (twenty-seven months).
Therefore, the depreciation expense for June is $5,000 ($135,000 � 27 months � 1
month).