FAR depreciation question _ context comprehension

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  • #186663

    Hey guys I understand how formulas and other stuff work here, but I have problems with understanding the context (I am an international applicant). Please help:))

    Question CPA-06957

    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?

    a. $22,000

    b. $30,000

    c. $25,000

    d. $20,000 (correct. Actually I got this wrong because I knew my understanding was wrong, I kinda figured this number out, but still am so confused! )

    So based on my understanding, let’s say four years ago is “Year 1”, then current year would be “Year 5”. Therefore, on 1/1/Y5, the carrying amount would be 150,000 (250,000-25,000*4), so at the end of Year 5 the carrying value would be 125,000. Plus there is an impairment loss of 30,000 at the end of the Year 5, now the carrying value is 95,000. And there’s five years left, so the depreciation expense would be 19,000 per year.

    I am sure I got wrong on understanding… Please correct me đŸ™‚

    Nothing good comes easy, all good things take some time - Hang in there!
    FAR Q3/14 88
    BEC Q3/14 82
    AUD Q4/14
    REG Q2/15

Viewing 4 replies - 1 through 4 (of 4 total)
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  • #578528
    mla1169
    Participant

    The impairment loss is in year 4. The book value at the end of year 4 is $120k. (250,000-100,000 depreciation-30,000 loss) That $120,000 is depreciated over the remaining 6 years at $20,000 per year ($120,000/6)

    The wording is tricky (on purpose).

    FAR- 77
    AUD -49, 71, 84
    REG -56,75!
    BEC -75

    Massachusetts CPA (non reporting) since 3/12.

    #578529
    Anonymous
    Inactive

    I didn't go through all the calculations, but in reading the question I would have assumed that it started on 01/02/X1 and the impairment loss occurred on 12/31/x4 because that would really be 4 full years. I have actually never seen a question worded that way so I don't think you will have to put that much thought in figuring out how they came to the “four years later” part.

    #578530
    Anonymous
    Inactive

    sleepinthegardn,

    The carrying amount in Year 5 is 150000 250-25*4). They recognize the impairment first, so it becomes 120000, then there is 6 years left 120000/6

    #578531

    Oh my gosh this is my first time posting here, and I didn't expect so many prompt replies!!!

    mla1169, CPAMommyof3, anjanja, Thank you all and I am clear now!

    Btw, this question is in the Becker Homework part đŸ™‚

    I love this forum :))))

    Nothing good comes easy, all good things take some time - Hang in there!
    FAR Q3/14 88
    BEC Q3/14 82
    AUD Q4/14
    REG Q2/15

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