CPA Financial Accounting and Reporting Far Quiz: Account For Asset Disposals And Impairment

What this quiz covers

This quiz focuses on Account For Asset Disposals And Impairment, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Financial Accounting and Reporting Far.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. $20,000
2. $10,000
3. $0
4. $4,000 (correct answer)

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$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.

Question 2

1. The disposal of any asset qualifies as a discontinued operation if it generates a material gain.
2. 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. (correct answer)
3. A discontinued operation must involve the sale of all assets and liabilities of the entire entity.
4. Any disposal generating proceeds exceeding $1 million qualifies as a discontinued operation.

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.

Question 3

1. The ARO liability is settled, and any difference between the settlement amount and the ARO carrying value is recognized as a gain or loss. (correct answer)
2. The ARO liability is transferred to the buyer of the asset upon disposal.
3. The ARO liability is reversed and credited to reduce the gain on disposal.
4. 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.

Question 4

1. $0; no impairment because annual cash flows are positive.
2. $125,000; the difference between carrying amount and undiscounted cash flows.
3. $120,000; the difference between carrying amount and fair value. (correct answer)
4. $600,000; the entire carrying amount is written off.

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.

Question 5

1. A significant adverse change in the legal or business climate affecting the asset. (correct answer)
2. The asset reaches the midpoint of its stated useful life.
3. The company reports a net loss for the fiscal year.
4. A change in the prevailing interest rate environment.

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.

Question 6

1. Impairment losses on long-lived assets held for use cannot be reversed under U.S. GAAP. (correct answer)
2. Impairment losses may be reversed if the asset's fair value recovers above its impaired carrying amount.
3. Impairment losses may be partially reversed, but the carrying amount cannot exceed original cost.
4. Both held-for-use and held-for-sale assets prohibit reversal of all impairment losses.

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.

Question 7

1. $22,000
2. $60,000
3. $25,000 (correct answer)
4. $0

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.

Question 8

1. $300,000
2. $0
3. $250,000 (correct answer)
4. $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.

Question 9

1. $64,000
2. $50,000 (correct answer)
3. $57,000
4. $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.

Question 10

1. $50,000 (correct answer)
2. $0
3. $400,000
4. $350,000

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.

Question 11

1. Equally among all assets in the group regardless of carrying amount.
2. Proportionally based on each asset's fair value relative to total group fair value.
3. Entirely to the asset with the highest carrying amount within the group.
4. Pro rata based on the carrying amounts of long-lived assets in the group, subject to a floor of zero for each individual asset. (correct answer)

Explanation: 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.

Question 12

1. Depreciation continues using the same method and rate until the asset is sold.
2. Depreciation is accelerated to match the expected remaining period of ownership.
3. Depreciation ceases upon classification as held for sale. (correct answer)
4. Depreciation is reduced to 50% of the normal rate to reflect reduced use.

Explanation: 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.

Question 13

1. $120,000 loss
2. $120,000 gain (correct answer)
3. $0; no gain is recognized until a replacement asset is acquired
4. $420,000 gain

Explanation: 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.

Question 14

1. Replacement cost adjusted for physical deterioration only.
2. The asset's original cost less total accumulated depreciation.
3. The present value of only the revenues directly attributable to the asset.
4. The income approach using present value of expected future cash flows, or the market approach using prices of comparable assets. (correct answer)

Explanation: 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.

Question 15

1. Management has committed to a plan to sell the asset.
2. The asset is being marketed at a price reasonable in relation to its fair value.
3. The asset must be sold within 6 months of the classification date. (correct answer)
4. It is unlikely that significant changes to the plan or its withdrawal will occur.

Explanation: 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.

Question 16

1. Goodwill impairment losses may be reversed in a subsequent period if the reporting unit's fair value recovers.
2. Goodwill impairment losses are amortized over the remaining expected useful life of the goodwill.
3. Goodwill impairment losses automatically reduce the tax basis of goodwill on a dollar-for-dollar basis.
4. Goodwill impairment losses cannot be reversed once recognized. (correct answer)

Explanation: 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.

Question 17

1. $35,000
2. $40,000 (correct answer)
3. $30,000
4. $45,000

Explanation: When an exchange has commercial substance, the new asset is recorded at the fair value of assets given up plus any cash paid. Fair value of old equipment = $35,000; cash paid =$5,000. New equipment cost = $35,000 +$5,000 = $40,000. A gain of$5,000 ($35,000 FV -$30,000 book value) is also recognized. Answer B is correct. Answer A omits the cash paid. Answer C uses book value rather than fair value. Answer D adds cash to cost rather than to fair value.

Question 18

1. $70,000 (correct answer)
2. $20,000
3. $50,000
4. $0

Explanation: Under ASC 360, an asset is impaired when undiscounted expected future cash flows ($480,000) are less than the carrying amount ($500,000). The recoverability test is failed. The impairment loss equals the excess of carrying amount over fair value: $500,000 -$430,000 = $70,000. Answer A is correct. Answer B uses carrying amount minus undiscounted cash flows, which is not the correct measurement. Answer C is not based on either correct method. Answer D is incorrect because the recoverability test is failed.

Question 19

1. Goodwill represents less than 10% of the reporting unit's total assets.
2. The reporting unit has reported positive net income for three consecutive years.
3. No acquisitions have been made in the past five years.
4. It is more likely than not that the fair value of the reporting unit exceeds its carrying amount. (correct answer)

Explanation: 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.

Question 20

1. The replacement cost of the asset has increased due to general inflation.
2. The company has refinanced its outstanding debt at a lower interest rate.
3. A significant decrease in the market price of the asset. (correct answer)
4. The company has hired additional staff to operate the asset more efficiently.

Explanation: ASC 360 lists triggering events for impairment review, including a significant decrease in the market price of a long-lived asset. Answer C is correct. Answer A - rising replacement cost - is favorable and indicates no impairment concern. Answer B - debt refinancing - affects financing costs but is not an impairment indicator for individual operating assets. Answer D - increased staffing for efficiency - is a positive operational development and not an impairment indicator.