[Aj]

Is impairment supposed to be tested AFTER depreciation is taken or before depreciation is taken? For example in the question below:

On January 1, Year 1, Chertco acquired a patent for $500,000 and, using the straight-line method, began amortizing it properly over its estimated useful life of 10 years. The asset has no residual value. At December 31, Year 4, a significant change in the business climate caused Chertco to assess the recoverability of the carrying amount of the patent. Chertco estimated that the undiscounted future net cash inflows from the patent would be $325,000 and that its fair value was $275,000. Accordingly, for the year ended December 31, Year 4, Chertco should recognize an impairment loss of:

The answer is $0 because impairment was tested before depreciation was taken. But I have 100% seen questions where the depreciation is taken, and then impairment is tested.

Please help! Thanks!

[Cobalt60]

The value at 12/31/4 after depreciation would be 300k. Since it's less than the 325k of undiscounted future cash flow the asset is not impaired.

The answer is $0 because impairment was tested AFTER depreciation.

If you are testing for impairment on 12/31 then the years depreciation has already occurred.

I could be wrong and frequently am.

[Author]

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