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Account For Asset Disposals And Impairment - CPA Far

  1. A company holds a trade name classified as an indefinite-lived intangible asset with a carrying amount of $400,000. Using the relief-from-royalty method, the trade name's fair value is estimated at $350,000. What impairment loss should be recognized?
    Answer: $50,000 Under ASC 350, indefinite-lived intangible assets (other than goodwill) are tested for impairment by comparing the carrying amount to fair value. Since the carrying amount ($400,000) exceeds fair value ($350,000), an impairment loss of $50,000 is recognized. Answer A is correct. Answer B is incorrect because the fair value is below carrying amount. Answer C writes off the entire asset. Answer D uses fair value as the impairment amount rather than the excess of carrying amount over fair value.
  2. Which of the following best distinguishes a discontinued operation from the disposal of an individual asset under U.S. GAAP?
    Answer: A discontinued operation involves disposal of a component representing a separate major line of business or geographic area; disposal of an individual asset does not qualify. Under ASC 230, a discontinued operation is a component of an entity that represents a strategic shift - specifically a separate major line of business or a major geographic area of operations - that has been disposed of or meets held-for-sale criteria. The disposal of an individual asset does not meet this definition. Answer B is correct. Answers A and D apply materiality and dollar thresholds that do not exist in GAAP for this classification. Answer C incorrectly requires disposal of the entire entity rather than a major component.
  3. When measuring the fair value of a long-lived asset for impairment purposes under ASC 360 and ASC 820, and no active market exists for the asset, which of the following approaches is most appropriate?
    Answer: The income approach using present value of expected future cash flows, or the market approach using prices of comparable assets. Under ASC 820, fair value is measured using the price that would be received to sell an asset in an orderly transaction. When no active market exists, acceptable approaches include the income approach (present value of expected future cash flows) and the market approach (prices of comparable assets). Answer D is correct. Answer A is a cost approach that ignores functional and economic obsolescence. Answer B is book value, not fair value. Answer C is incomplete because it includes only revenues and omits related costs, which would overstate value.
  4. Equipment has a carrying amount of $600,000 and a remaining useful life of 5 years. Expected annual net cash inflows are $95,000 per year, and the equipment's fair value is $480,000. Should an impairment loss be recognized, and if so, for what amount?
    Answer: $120,000; the difference between carrying amount and fair value. Step 1 (recoverability test): Undiscounted cash flows = $95,000 x 5 = $475,000 < $600,000 carrying amount. The asset fails the recoverability test and is impaired. Step 2 (measurement): Impairment loss = $600,000 - $480,000 (fair value) = $120,000. Answer C is correct. Answer A incorrectly passes the recoverability test based on positive cash flows rather than comparing total undiscounted flows to carrying amount. Answer B uses undiscounted cash flows rather than fair value to measure the loss. Answer D fully writes off the asset with no basis in ASC 360.
  5. Under U.S. GAAP, which of the following statements correctly describes the treatment of goodwill impairment losses after they are recognized?
    Answer: Goodwill impairment losses cannot be reversed once recognized. Under ASC 350, goodwill impairment losses are permanent and cannot be reversed after recognition. Answer D is correct. Answer A describes treatment under IFRS (IAS 36), not U.S. GAAP. Under U.S. GAAP, once impaired, goodwill carrying amount is reduced and cannot be written back up. Answer B is incorrect; goodwill is not amortized after impairment under public company GAAP. Answer C is incorrect; the tax treatment of goodwill impairment requires separate deferred tax analysis and does not automatically track the book impairment.
  6. A machine costing $120,000 was purchased on April 1, Year 1. The machine has a 4-year useful life, an $8,000 salvage value, and is depreciated straight-line on a calendar-year basis. The machine is sold on September 30, Year 3. What is the book value of the machine on the date of sale?
    Answer: $50,000 Annual depreciation = ($120,000 - $8,000) / 4 = $28,000. Year 1 (Apr-Dec, 9 months): $28,000 x 9/12 = $21,000. Year 2 (full year): $28,000. Year 3 (Jan-Sep, 9 months): $28,000 x 9/12 = $21,000. Total accumulated depreciation = $70,000. Book value = $120,000 - $70,000 = $50,000. Answer B is correct. Answer A omits Year 3 partial-year depreciation. Answer C uses only 2.5 years. Answer D deducts too much accumulated depreciation.
  7. A company trades in old equipment (book value $15,000, fair value $20,000) for new equipment with a list price of $45,000. The dealer grants a $20,000 trade-in allowance, and the company pays $25,000 cash. The exchange has commercial substance. At what amount should the new equipment be recorded, and what gain or loss is recognized?
    Answer: New equipment recorded at $45,000; $5,000 gain recognized. With commercial substance, the new asset is recorded at fair value of consideration given: FV of old equipment ($20,000) + cash paid ($25,000) = $45,000. Gain on old equipment = FV ($20,000) - book value ($15,000) = $5,000. Answer A is correct. Answer B omits the gain. Answer C records the correct amount but fails to recognize the gain. Answer D uses book value of the old asset rather than fair value, ignoring the commercial substance of the exchange.
  8. Under the qualitative assessment option for goodwill impairment testing (ASC 350), a company may bypass the quantitative impairment test if it concludes that:
    Answer: It is more likely than not that the fair value of the reporting unit exceeds its carrying amount. Under ASC 350, the qualitative assessment (Step 0) allows an entity to skip the quantitative test if it concludes that it is more likely than not (greater than 50% likelihood) that the reporting unit's fair value exceeds its carrying amount. Answer D is correct. The other answer choices - asset ratios (A), consecutive profits (B), and acquisition history (C) - are not the standard for bypassing the quantitative test under ASC 350.
  9. When a long-lived asset is classified as held for sale, which of the following correctly describes the depreciation treatment under ASC 360?
    Answer: Depreciation ceases upon classification as held for sale. Under ASC 360, depreciation of a long-lived asset ceases when the asset is classified as held for sale. The asset is subsequently measured at the lower of carrying amount or fair value less costs to sell. Answer C is correct. Answers A and B incorrectly continue or accelerate depreciation. Answer D has no basis in GAAP - a partial rate reduction is not prescribed by ASC 360.
  10. A company exchanges equipment (cost $60,000, accumulated depreciation $35,000, fair value $22,000) for similar equipment with a fair value of $22,000. The exchange lacks commercial substance and no cash is exchanged. At what amount should the new equipment be recorded?
    Answer: $25,000 When an exchange lacks commercial substance, no gain is recognized and the new asset is recorded at the book value of the asset given up. Book value of old equipment = $60,000 - $35,000 = $25,000. New equipment is recorded at $25,000. Answer C is correct. Answer A uses fair value, which applies only when commercial substance exists. Answer B uses original cost. Answer D incorrectly records nothing for the new asset.
  11. A company reclassifies a long-lived asset as held for sale. At the reclassification date, the asset's carrying amount is $200,000, its fair value is $185,000, and estimated costs to sell are $10,000. At what amount should the asset be reported upon classification as held for sale?
    Answer: $175,000 Under ASC 360, assets held for sale are measured at the lower of carrying amount or fair value less costs to sell. Fair value less costs to sell = $185,000 - $10,000 = $175,000. Since $175,000 < $200,000 carrying amount, the asset is written down to $175,000. Answer B is correct. Answer A omits costs to sell. Answer C uses carrying amount without comparison. Answer D deducts costs to sell from carrying amount rather than from fair value.
  12. A company's warehouse with a carrying amount of $300,000 was destroyed by fire. The company receives $420,000 in insurance proceeds. What amount should the company recognize in the income statement as a result of the involuntary conversion?
    Answer: $120,000 gain An involuntary conversion is treated as a disposal under U.S. GAAP. The gain equals insurance proceeds minus the carrying amount: $420,000 - $300,000 = $120,000. Answer B is correct. Answer A incorrectly records a loss when proceeds exceed carrying amount. Answer C reflects an incorrect deferral approach not permitted under GAAP. Answer D uses total proceeds as the gain without deducting the book value.
  13. When a company retires a long-lived asset that had an associated asset retirement obligation (ARO), which of the following correctly describes the accounting treatment?
    Answer: The ARO liability is settled, and any difference between the settlement amount and the ARO carrying value is recognized as a gain or loss. Under ASC 410, when an asset with an ARO is retired, the ARO liability is settled. If actual settlement costs differ from the carrying value of the ARO, a gain or loss is recognized. Answer A is correct. Answer B is incorrect because AROs are legal obligations of the asset owner, not transferable to buyers absent a contractual assumption. Answer C incorrectly nets the ARO against the disposal gain rather than treating settlement separately. Answer D incorrectly reclassifies the ARO as contingent upon retirement.
  14. When an impairment loss is determined for an asset group under ASC 360, how should the impairment loss be allocated among the assets in the group?
    Answer: Pro rata based on the carrying amounts of long-lived assets in the group, subject to a floor of zero for each individual asset. Under ASC 360, an impairment loss measured for an asset group is allocated to the long-lived assets in the group on a pro rata basis using their relative carrying amounts. Each asset's carrying amount may not be reduced below its individual fair value, if determinable, and cannot be reduced below zero. Answer D is correct. Answer A uses equal allocation rather than relative carrying amounts. Answer B allocates based on fair values, which is not the prescribed method. Answer C concentrates the entire loss on one asset, which is not permitted under ASC 360.
  15. A reporting unit has a carrying amount of $1,200,000, which includes $300,000 of allocated goodwill. The reporting unit's fair value is determined to be $950,000. What is the goodwill impairment loss under the one-step test (ASC 350)?
    Answer: $250,000 Under the simplified one-step goodwill impairment test, impairment equals the excess of the reporting unit's carrying amount over its fair value: $1,200,000 - $950,000 = $250,000. The loss is capped at the carrying amount of goodwill ($300,000), so $250,000 is recognized. Answer C is correct. Answer A incorrectly writes off all goodwill. Answer B implies no impairment exists. Answer D has no basis in the calculation.
  16. Eastern Corp. has a policy of testing assets for impairment annually. On December 31, 2024, the company's manufacturing equipment had a carrying amount of $500,000. The equipment generates cash flows independently from other assets. Management estimates the equipment will generate net cash inflows of $75,000 per year for the next 8 years. The appropriate discount rate is 10%, and the equipment's fair value less costs to sell is $485,000. Using the present value factor of 5.335 for 8 periods at 10%, what action should Eastern Corp. take?
    Answer: No impairment loss should be recognized because undiscounted future cash flows exceed the carrying amount of the equipment Under U.S. GAAP, the first step in impairment testing is comparing carrying amount to undiscounted future cash flows. Undiscounted cash flows = $75,000 × 8 = $600,000. Since $600,000 > $500,000 (carrying amount), the asset is recoverable and no impairment exists. The present value calculation and fair value are irrelevant once the recoverability test is passed. Choice B incorrectly proceeds to measurement step. Choice C uses discounted cash flows for the recoverability test. Choice D misapplies the relationship between present value and fair value.
  17. Under ASC 360, which of the following is NOT a required criterion for classifying a long-lived asset as held for sale?
    Answer: The asset must be sold within 6 months of the classification date. ASC 360 requires that a sale be probable and expected to be completed within 12 months of classification, not 6 months. Answer C is NOT a required criterion and is therefore correct. All other answer choices reflect actual ASC 360 criteria: management commitment (A), reasonable pricing (B), and plan stability (D) are all required for held-for-sale classification.
  18. Denver Corp. exchanged old equipment (cost $150,000, accumulated depreciation $90,000) plus $25,000 cash for new equipment with a fair value of $95,000. The old equipment had a fair value of $70,000. The exchange has commercial substance. What is the gain or loss Denver should recognize?
    Answer: Gain of $10,000 calculated as the difference between fair value and carrying amount of surrendered asset Since the exchange has commercial substance, gains and losses are recognized. The carrying amount of old equipment is $150,000 - $90,000 = $60,000. The fair value is $70,000. Therefore, Denver recognizes a gain of $70,000 - $60,000 = $10,000. The cash paid and fair value of new equipment are irrelevant to the gain/loss calculation on the old asset. Choice B incorrectly includes accumulated depreciation in the calculation. Choice C incorrectly compares total consideration to fair value received rather than focusing on the disposed asset. Choice D is wrong because commercial substance means gains/losses are recognized, not deferred.
  19. Based on the following information, what impairment loss should Central Industries recognize for this facility? Carrying amounts: Land $200,000, Building $600,000, Equipment $400,000. Estimated undiscounted future cash flows: $950,000. Fair value of entire facility: $850,000. Individual fair values: Land $180,000, Building $500,000, Equipment $250,000.
    Answer: $350,000, with impairment allocated to land first for the shortfall in its fair value, then remaining loss allocated to building and equipment First, test recoverability: Total carrying amount ($1,200,000) > undiscounted cash flows ($950,000), so impairment exists. Impairment loss = $1,200,000 - $850,000 (fair value) = $350,000. Under ASC 360, when land's individual carrying amount exceeds its fair value, that shortfall is recognized first: $200,000 - $180,000 = $20,000 to land. The remaining $330,000 is allocated to depreciable assets (building and equipment) based on their relative carrying amounts. Choice A incorrectly allocates proportionally to all assets. Choice B uses individual asset approach. Choice D confuses the recoverability test with the measurement of impairment loss.
  20. A company purchased equipment for $80,000 on January 1, Year 1. The equipment has a 5-year useful life, no salvage value, and is depreciated straight-line. On December 31, Year 3, the company sells the equipment for $38,000 cash. What gain or loss should be recognized on the sale?
    Answer: $6,000 gain Annual depreciation = $80,000 / 5 = $16,000. Accumulated depreciation after 3 years = $48,000. Book value at disposal = $80,000 - $48,000 = $32,000. Gain = $38,000 proceeds - $32,000 book value = $6,000. Answer A is correct. Answer B incorrectly uses cost minus proceeds. Answer C reverses the sign. Answer D uses proceeds as the gain without subtracting book value.

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