[Anonymous]

I simply can’t see why they only used two years of depreciation instead of three in determining impairment. Here’s the question

Linx Corporation acquired equipment on January 1, 2008 for $100,000. The equipment had a ten-year useful life and no salvage value. On December 31, 2010, the following information was obtained regarding the equipment :

Expected value of undiscounted cash flows: $72,000

Fair Value estimated with in-use valuation premise $74,000

Fair value estimated with in-exchange valuation premise $70,000

What is the amount of impairment loss that Linx should report in its 2010 income statement?

a. $ 6,000

b. $ 8,000

c. $10,000

d. $0

Wiley’s Answer: a. They calculated carrying value as $80,000, using only 2 years of depreciation. So that would leaving an impairment loss of 6,000

My answer: d. I used 3 years of depreciation since the asset was acquire in Jan 1,2008. Using the information from 12/31/2010, i assumed 2010 depreciation was recorded, so the carrying value i calculated was $70,000. Since the inuse valuation is greater than the carrying value, I felt no impairment loss is recorded.

What is it that i’m not reading correctly? i can’t see where i’m wrong

[Anonymous]

The question is really “what should be the expense on the income statement?”. It wouldn't make sense to record depreciation, then record the impairment since they're both expenses on the income statement which decrease the book value of the asset. So if you're trying to calculate the 2010 expense, you'd use the book value at the beginning of the year. I was more confused by “in-use valuation premise” – never heard that before…

[hmubeen]

First of all you have to make a correction in the question in the year, instead of acquiring the equipment in 2008, its 2009.

Then you will take 2 years of dep. exp 2009 & 2010 which is 20000. Then the Carrying value of asset would be 80000. Then you will apply level one which is stand alone value which is 74000. This would give you 6000 impairment loss.

There are three level:

1. stand alone/in use

2. exchange

3 Undiscounted cash flow

You would always try to apply the lowest level if given, in this question you were given all three, so you would use level 1.

Cindy did this problem durring the lecture. (Yaeger)

I try my best explaining it but I know I suck so I hope I didn't confuse you even more.

REG 11/15/10 74 (ouchee) FAR 2/23/11

[Author]

Replies