[Goal75]

I am using Wiley 2010 for FAR and I need help with this question…

Linx Corp acquired equip on Jan 1, 2008 for $100,000. The equip had a 10 yr useful life and no salvage value. On Dec 31, 2010, the foll info 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 I/S?

a. $ 6,000

b. $ 8,000

c. $10,000

d. $ 0

The answer is “a”. I am not arriving at this answer as I am taking the Depreciation for 2010 also. The book takes depreciation only for 2008,2009. Why is depreciation for 2010 not taken into account?

Can someone please clarify this?

Thank you.

REG 83 (Lost credit), 78 🙂
AUD 8/29/13
BEC 67, 75
FAR 76

[Anonymous]

Does the problem say if you are selling the asset or keeping it? You only record an impairment loss if the Carrying Value is more than the undiscounted cash flows, in this case 80,000 vs 72,000. The asset is impaired. The amount you write it down to depends on whether or not you are keeping the asset or classifying it as available for sale. In this case it appears you are keeping the asset so you would write it down to 74,000 and have a 6,000 loss. Clear as mud?

[forever4]

I think the question is why the 2010 depreciation cost was not taken into account.

FAR 5/14 88 PASSED!
REG 7/13 74 :((((((((....! I cant believe it!!!! I studied so hard...
REG retake 11/29 -> 89!!!!!!!!!!!!!!!!!!!
BEC 10/11/12 -> 84!!!!!!!!!!!!!
AUD 10/25/12 -> 95!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

I'm DONE! OMG 8 months of hard work.

I SHALL PASS. BECAUSE IT'S ME, SO EVERYTHING WILL BE OK!

[Anonymous]

I'm a JE kind of person. I can see things clearer that way.

1/1/08

Machine dr. 100,000

Note cr. 100,000

12/31/08

Dep Exp dr. 10,000

Acc Dep cr. 10,000

12/31/09

Dep Exp dr. 10,000

Acc Dep cr. 10,000

Step #1 Recoverability Test = If CV is more than Undiscounted Cash Flows then it is impaired

Carrying Value:

Equipment = 100,000

Acc. Dep = 20,000

CV = 80,000

Undiscounted Cash Flows = 72,000

80,000 > 72,000

It's impaired. Go to Step #2 (Here is where I have to assume you are keeping the equipment because it won't work if you sell it)

Step #2 – Fair Value in use – Carrying Value

74,000 – 80,000 = 6,000

JE to book the loss:

Loss on Impairment dr. 6,000

Acc Dep. dr. 20,000

Equipment cr. 26,000

This will value the asset at 74,000 on the books and you begin deprecation over the rest of its useful life at this amount. You can not write the equipment back up to 100,000 if the equipment is held for use. It will be on your balance sheet at 74,000 not at 100,000. Does this help?

[forever4]

Well, the thing is the value is on December 2010 NOT 2009 -> that means you need to depreciate that 2010 year too. However, the answer key only depreciate 2008 and 2009 and not include that 2010 year even though the FV recorded is in the end of 2010.

That's what i'm wondering too. If it's not in 2010 then it's easy to understand why the answer is 6000!

Thanks though! 🙂

FAR 5/14 88 PASSED!
REG 7/13 74 :((((((((....! I cant believe it!!!! I studied so hard...
REG retake 11/29 -> 89!!!!!!!!!!!!!!!!!!!
BEC 10/11/12 -> 84!!!!!!!!!!!!!
AUD 10/25/12 -> 95!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

I'm DONE! OMG 8 months of hard work.

I SHALL PASS. BECAUSE IT'S ME, SO EVERYTHING WILL BE OK!

[Anonymous]

If you include the current years depreciation then the asset isn't impaired. Every example I found does not depreciate in the year of impairment. I'm not sure of the standard number but I'll look for it and post it.

[Anonymous]

Here is the standard.

“Subsequent Measurement

360-10-35-21

A long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The following are examples of such events or changes in circumstances:

a. A significant decrease in the market price of a long-lived asset (asset group)

b. A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition

c. A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator

d. An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group)

e. A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group)

f. A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent.”

I'm thinking there is more to the problem than the OP gave, such as date they indicated that it might be impaired and the use of the asset, i.e. for sale or in-use. The OP did note that he/she was using Wiley 2010. Also remember that the use of the asset after impairment will determine if you depreciate it any further. If the asset is going to be used by the company after impairment then you use the new Carrying Value to depreciate over the remaining useful life. If the asset is held for sale and not used then you do not depreciate. I can see the examiners making all sorts of tricky questions with this one!

I love posts like this. It is learning experience for us all. Good Luck!

[forever4]

I think I sorta understand you.

Pretty much impairment loss is in 2010 so it would use a different depreciation base after recording the loss -> don't take into account the 2010 deprecation exp!

FAR 5/14 88 PASSED!
REG 7/13 74 :((((((((....! I cant believe it!!!! I studied so hard...
REG retake 11/29 -> 89!!!!!!!!!!!!!!!!!!!
BEC 10/11/12 -> 84!!!!!!!!!!!!!
AUD 10/25/12 -> 95!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

I'm DONE! OMG 8 months of hard work.

I SHALL PASS. BECAUSE IT'S ME, SO EVERYTHING WILL BE OK!

[Author]

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