Account For Asset Disposals And Impairment
Help Questions
CPA Financial Accounting and Reporting (FAR) › Account For Asset Disposals And Impairment
A company exchanges equipment (book value $30,000, fair value $50,000) for new equipment with a fair value of $40,000 plus $10,000 cash (boot received). The exchange lacks commercial substance. How much gain should be recognized at the time of the exchange?
$0
$10,000
$4,000
$20,000
Explanation
When boot is received and the exchange lacks commercial substance, a partial gain is recognized. Total gain = FV of asset given ($50,000) - book value ($30,000) = $20,000. Proportion of boot to total proceeds = $10,000 / $50,000 = 20%. Gain recognized = $20,000 x 20% = $4,000. Answer D is correct. Answer A recognizes the full gain, which is not permitted when commercial substance is absent. Answer B incorrectly uses the boot amount as the gain. Answer C ignores the requirement to recognize a proportional gain when boot is received.
Which of the following best distinguishes a discontinued operation from the disposal of an individual asset under U.S. GAAP?
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.
Any disposal generating proceeds exceeding $1 million qualifies as a discontinued operation.
A discontinued operation must involve the sale of all assets and liabilities of the entire entity.
The disposal of any asset qualifies as a discontinued operation if it generates a material gain.
Explanation
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.
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?
The ARO liability is reversed and credited to reduce the gain on disposal.
The ARO liability is transferred to the buyer of the asset upon disposal.
The ARO liability is settled, and any difference between the settlement amount and the ARO carrying value is recognized as a gain or loss.
The ARO is reclassified as a contingent liability upon asset retirement.
Explanation
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.
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?
$0; no impairment because annual cash flows are positive.
$125,000; the difference between carrying amount and undiscounted cash flows.
$600,000; the entire carrying amount is written off.
$120,000; the difference between carrying amount and fair value.
Explanation
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.
Which of the following events would most likely trigger an impairment assessment for a finite-lived intangible asset under ASC 360?
A change in the prevailing interest rate environment.
The asset reaches the midpoint of its stated useful life.
The company reports a net loss for the fiscal year.
A significant adverse change in the legal or business climate affecting the asset.
Explanation
ASC 360 identifies triggering events for impairment testing, including a significant adverse change in the extent or manner in which a long-lived asset is used, or a significant adverse change in legal factors or business climate. Answer A is correct. Answer B - reaching the midpoint of useful life - is not an impairment indicator. Answer C - reporting a net loss - is not a listed triggering event for individual asset impairment. Answer D - interest rate changes - affects discount rates but is not a direct triggering event under ASC 360.
Under U.S. GAAP, which of the following statements is correct regarding the reversal of previously recognized impairment losses on long-lived assets held for use?
Both held-for-use and held-for-sale assets prohibit reversal of all impairment losses.
Impairment losses on long-lived assets held for use cannot be reversed under U.S. GAAP.
Impairment losses may be reversed if the asset's fair value recovers above its impaired carrying amount.
Impairment losses may be partially reversed, but the carrying amount cannot exceed original cost.
Explanation
Under ASC 360, impairment losses on long-lived assets held for use are not reversed after recognition. Answer A is correct. Answer B describes the IFRS approach (IAS 36), which permits reversals. Answer C also incorrectly permits reversals. Answer D is incorrect because assets classified as held for sale can have previously recognized impairment losses reversed, up to the cumulative amount previously recognized.
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?
$0
$60,000
$25,000
$22,000
Explanation
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.
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)?
$250,000
$0
$300,000
$200,000
Explanation
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.
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?
$57,000
$50,000
$64,000
$43,000
Explanation
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.
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?
$350,000
$50,000
$0
$400,000
Explanation
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.