CPA Quiz: Account For Asset Disposals And Impairment
20 questions · exam conditions
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Account For Asset Disposals And ImpairmentQuestion 1 of 20

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?

$20,000
$10,000
$0
$4,000
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CPA Quiz: Account For Asset Disposals And Impairment

Practice Account For Asset Disposals And Impairment in CPA with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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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.

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Question 1

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?

  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)−bookvalue(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.

Question 2

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?

  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 3

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?

  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 4

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)?

  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.Thelossiscappedatthecarryingamountofgoodwill(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 5

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?

  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 6

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?

  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)exceedsfairvalue(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 7

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?

  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 8

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?

  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 9

Under ASC 360, which of the following is NOT a required criterion for classifying a long-lived asset as held for sale?

  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 10

A company exchanges old equipment (cost $80,000, accumulated depreciation $50,000, fair value $35,000) for new equipment and pays $5,000 cash. The exchange has commercial substance. At what amount should the new equipment be recorded?

  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(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 11

A company holds manufacturing equipment with a carrying amount of $500,000. The equipment is expected to generate undiscounted future cash flows of $480,000 over its remaining useful life. The equipment's current fair value is $430,000. What impairment loss, if any, should the company recognize?

  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)arelessthanthecarryingamount(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 12

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?

  1. $6,000 gain (correct answer)
  2. $42,000 gain
  3. $6,000 loss
  4. $38,000 gain
Explanation: 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.

Question 13

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?

  1. New equipment recorded at $45,000; $5,000 gain recognized. (correct answer)
  2. New equipment recorded at $40,000; no gain recognized.
  3. New equipment recorded at $45,000; no gain recognized.
  4. New equipment recorded at $15,000; no gain recognized.
Explanation: With commercial substance, the new asset is recorded at fair value of consideration given: FV of old equipment (20,000)+cashpaid(20,000) + cash paid (25,000) = 45,000.Gainonoldequipment=FV(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.

Question 14

A long-lived asset classified as held for sale was written down from a carrying amount of $100,000 to $80,000 (fair value less costs to sell). In a subsequent period, the fair value less costs to sell increases to $110,000. At what amount should the asset be reported in the subsequent period?

  1. $110,000
  2. $100,000 (correct answer)
  3. $80,000
  4. $90,000
Explanation: Under ASC 360, subsequent increases in fair value less costs to sell of a held-for-sale asset may be recognized as a gain, but only up to the cumulative loss previously recognized. The previous write-down was $20,000. The recovery available is 30,000(30,000 (110,000 - $80,000), but it is capped at $20,000. Carrying amount = $80,000 + $20,000 = $100,000. Answer B is correct. Answer A would allow recovery beyond the original carrying amount, which is prohibited. Answer C ignores the recovery entirely. Answer D has no basis in the calculation.

Question 15

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?

  1. $185,000
  2. $175,000 (correct answer)
  3. $200,000
  4. $190,000
Explanation: 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.

Question 16

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?

  1. Gain of $10,000 calculated as the difference between fair value and carrying amount of surrendered asset (correct answer)
  2. Loss of $15,000 calculated as total consideration given less fair value of asset received plus accumulated depreciation
  3. Gain of $5,000 calculated as fair value of new asset less total consideration given including cash payment
  4. No gain or loss because the transaction involves like-kind property exchange with commercial substance determination
Explanation: 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.

Question 17

Central Industries operates a specialized manufacturing facility that has experienced significant declines in profitability. The facility consists of land, building, and equipment that work together as an integrated unit. Management is evaluating whether to continue operations or close the facility. The facility meets the criteria for impairment testing as a single asset group.

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.

  1. $350,000, allocated proportionally based on relative carrying amounts to all assets including land
  2. $280,000, calculated as the sum of individual asset impairments without regard to the asset group approach
  3. $350,000, with impairment allocated to land first for the shortfall in its fair value, then remaining loss allocated to building and equipment (correct answer)
  4. $150,000, representing only the difference between total carrying amount and estimated undiscounted future cash flows
Explanation: First, test recoverability: Total carrying amount (1,200,000)>undiscountedcashflows(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.

Question 18

Phoenix Industries owns a manufacturing facility that it plans to close due to market conditions. The facility has the following characteristics as of December 31, 2024: Original cost: $2,400,000, Accumulated depreciation: $1,600,000, Fair value: $650,000, Estimated selling costs: $50,000, Undiscounted future cash flows from continued use: $720,000.

If Phoenix classifies this facility as held for sale on December 31, 2024, what amount should be reported on the balance sheet?

  1. $600,000, representing fair value less costs to sell with no additional impairment beyond held-for-sale classification (correct answer)
  2. $650,000, representing fair value since the asset is no longer subject to depreciation when held for sale
  3. $720,000, representing the present value of future cash flows from the most advantageous disposal method
  4. $800,000, representing the current carrying amount since no impairment indicators exist for held-for-sale assets
Explanation: When an asset is classified as held for sale, it's measured at the lower of carrying amount or fair value less costs to sell. Carrying amount = $2,400,000 - $1,600,000 = $800,000. Fair value less costs to sell = $650,000 - $50,000 = $600,000. Since $600,000 < $800,000, the asset is written down to $600,000. Choice B uses fair value instead of fair value less costs to sell. Choice C incorrectly references present value and disposal methods not applicable to held-for-sale measurement. Choice D ignores the held-for-sale measurement requirement.

Question 19

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?

  1. No impairment loss should be recognized because undiscounted future cash flows exceed the carrying amount of the equipment (correct answer)
  2. Recognize an impairment loss of $15,000 based on the difference between carrying amount and fair value less costs to sell
  3. Recognize an impairment loss of $99,375 based on the difference between carrying amount and present value of future cash flows
  4. No impairment loss should be recognized because the present value of future cash flows exceeds fair value less costs to sell
Explanation: 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.

Question 20

Which of the following best distinguishes a discontinued operation from the disposal of an individual asset under U.S. GAAP?

  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.