Impairment Loss MCQ

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  • #1584982
    ab29
    Participant

    Can someone explain why the 200,000 is depreciated? I thought the 200k was compared to the carrying amount and than to book the impairment loss you deduct from FV the carrying amount (there is no FV in this problem). I’m having trouble wrapping my head around the concept.

    On January 2, Year 1, Reed Co. purchased a machine for $800,000 and established an annual depreciation charge of $100,000 over an eight-year life. During Year 4, after issuing its Year 3 financial statements, Reed concluded that: (1) the machine suffered permanent impairment of its operational value, and (2) $200,000 is a reasonable estimate of the amount expected to be recovered through use of the machine for the period January 1, Year 4, through December 31, Year 8. In Reed’s December 31, Year 4 balance sheet, the machine should be reported at a carrying amount of:

    answer: 160,000

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  • #1585025
    mccarta7
    Participant

    Hi @ab29!

    To determine whether to recognize impairment of a depreciable fixed asset, a company must compare the carrying amount of the fixed asset to the undiscounted future cash flows expected to be generated by the asset (the $200,000 in this case).

    The impairment loss was recognized by the company in the beginning of year 4, so the carrying value of the asset was $500,000 at this point [$800,000 – ($100,000 x 3 years)]. The undiscounted future cash flows are $200,000 so the impairment loss is $300,000. So the new carrying amount is $200,000 – which still needs to be depreciated over the remaining 5 years of useful life. The new yearly depreciation is $40,000 ($200,000 / 5 years). In the Year 4 balance sheet you want to take the new carrying amount minus the new depreciation ($200,000 – $40,000) to get to a end of year carrying amount of $160,000.

    I hope this helps!

    FAR : 90

    AUD : 86

    REG : 85

    BEC : Mar 2018

     

    Gleim, NINJA method and some Ninja supplement

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