Assume U.S. GAAP (generally accepted accounting pr
Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
A company has equipment with an original cost of $850,000, accumulated amortization of $300,000 and 5 years of estimated remaining useful life. Due to a change in market conditions the company now estimates that the equipment will only generate cash flows of $80,000 per year over its remaining useful life. The company’s incremental borrowing rate is 8 percent. Which of the following statements concerning impairment and future return on assets (ROA) is most accurate? The asset is:
A. impaired and future ROA increases.
B. impaired and future ROA decreases.
C. not impaired and future ROA increases.
参考解答
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2024-11-15 05:27:26
Ans:A.
Under U.S.GAAP, an asset is tested for impairment only when events and circumstance indicate the firm may not be able to recover the carrying value through future use.
1.Recoverability test. An asset is considered impaired if the carrying value (original cost less accumulated depreciation) is greater than the asset’s future undiscounted cash flow stream.
2.Loss measurement. If impaired, the asset’s value is written down to fair value on the balance sheet and a loss, equal to the excess of carrying value over the fair value of the asset (or the discounted value of its future cash flows if the fair value is not known), is recognized in the income statement.
The equipment is impaired. NBV = $550,000 which is greater than the sum of the undiscounted cash flows 5 yrs x $80,000 = $400,000.
The company’s future ROA will increase. Once the asset is written down, there will be lower depreciation charges, which will increase net income, and a lower carrying value of assets, which decreases total assets. Both factors would increase any future ROA.
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