ExpertMedium1 markMultiple Choice
CPA · Question 25 · Area II: Balance Sheet Accounts
A company is testing a long-lived asset for impairment. <br/>- Carrying Amount: $500,000<br/>- Undiscounted Future Cash Flows: $480,000<br/>- Fair Value: $450,000<br/><br/>What amount of impairment loss should be recognized?
A company is testing a long-lived asset for impairment. <br/>- Carrying Amount: $500,000<br/>- Undiscounted Future Cash Flows: $480,000<br/>- Fair Value: $450,000<br/><br/>What amount of impairment loss should be recognized?
Answer options:
A.
$0
B.
$20,000
C.
$50,000
D.
$30,000
How to approach this question
Two-step test for finite-lived assets: <br/>1. Recoverability: Is Carrying Amount > Undiscounted Cash Flows? If yes, proceed. <br/>2. Measurement: Carrying Amount - Fair Value.
Full Answer
C.$50,000✓ Correct
C
Step 1 (Recoverability Test): Compare Carrying Amount ($500,000) to Undiscounted Future Cash Flows ($480,000). Since Carrying Amount > Cash Flows, the asset is impaired.<br/>Step 2 (Measurement): Impairment Loss = Carrying Amount - Fair Value = $500,000 - $450,000 = $50,000.
Common mistakes
Writing down to Undiscounted Cash Flows ($20k loss). Skipping the recoverability test (though here it fails anyway).
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