Deck 18: Impairment of Assets

Question 1

Which of the following must be tested for impairment each year?

A) Amortized intangible assets
B) Intangible assets that aren't yet available
C) Intangible assets with indefinite useful life
D) Acquired goodwill
E) All of the above

Answer 1

All of the above

Question 2

Celt Caledonia has several patents on textile machinery. Because of technological advances in Asia that allow Asians to produce textiles faster and more efficiently, Celt Caledonia believes its patents are impaired. Celt Caledonia has determined that the fair market value of the patents is about €6 million less €500,000 in legal fees. Celt Caledonia has determined that the patent will generate €4 million each year for the next 2 years. At that point, it will have zero salvage value. Celt Caledonia's risk premium is 4 percent. The risk-free rate 3 percent. What is the patents' value in use (round to the nearest tenth of a million?

A) 5.5 million
B) 6 million
C) 7.2 million
D) 7.5 million
E) 7.7 million

Answer 2

7.2 million

Question 3

Which of the following is not a criterion for testing for impairment using the most recent calculation of the recoverable amount of a CGU to which goodwill has been allocated in the prior period?

A) Assets have not changed materially since the most recent recoverable value calculation
B) Liabilities have not changed materially since the most recent recoverable value calculation
C) The most recent calculation of recoverable amount far exceeded the carrying value
D) Goodwill allocated cannot be material in relation to the carrying value
E) The likelihood that the current recoverable amount would be less than the current carrying amount is remote

Answer 3

Goodwill allocated cannot be material in relation to the carrying value

Question 4

Which of the following would be considered a corporate asset?

A) A computer-assisted manufacturing program
B) Internet storefront server
C) Drug development center
D) Brick-and-mortar storefront
E) None of the above would be considered corporate assets

Question 5

Staffordshire is a manufacturer of Tung oil, spar varnish, resins, and fine urethanes for marine application. Accountants have determined that the recoverable amount of their urethane CGU is $14.00 million. The carrying amount of the goodwill allocated to the CGU is $1.00 million, and the carrying amount of the CGU's proprietary formula patents is $1.00 million. The urethane CGU also has mixing drums, storage tanks, and boilers with a carrying value of $10 million. Accounts receivable are carried at $2 million. Inventory is carried at $2 million. What is the impairment loss allocated to the formula patents (assuming that the only assets that the urethane CGU has are the ones listed)?

A) 812,500
B) 125,000
C) 62,500
D) None of the above

Question 6

Which of the following assets must be tested for impairment each year?

A) Intangible assets with indefinite useful lives
B) Intangible assets not yet available for use
C) Goodwill acquired in a business combination
D) All of the above

Question 7

If an asset is carried under the revaluation model, the im?pairment loss is recognized in other comprehensive income (OCI) to the extent that it

A) there is a balance in the revaluation surplus account.
B) is expected that the impairment loss is temporary in nature.
C) reverses a balance in revaluation surplus for the same asset from a previous upward revaluation.
D) that the asset will not be sold or retired within the current accounting cycle.

Question 8

An asset is impaired if

A) the present value of future cash flows is greater than the cost of the asset.
B) its carrying amount exceeds its recoverable amount.
C) its accumulated depreciation is greater than the cost of the asset.
D) its value is below market compared to the other assets in the cash generating unit.

Question 9

Walther-Neiderhausen, a publisher, has purchased a brand name from another publisher that focuses on publishing non-fiction books. The brand name suffered some negative publicity which may have damaged the brand name. An impairment test is required.

Question 10

A patent is carried under the revaluation model. It has been determined that the patent is impaired. There is a revaluation surplus of $25,000 and the impairment loss is $35,000. The revaluation surplus in OCI will have a debit balance.

Question 11

Buck & Sons Expeditionary is an outfitter for research expeditions. They have a patent on some proprietary crampons and ice picks that they have developed. These patents are part of their ice-climbing CGU. The patents are showing signs of impairment and the entire CGU must be tested.

Question 12

Bear & Brothers Boating manufactures custom yachts and wooden vessels. They have a CGU with $5 million worth of goodwill allocated to it. Only the goodwill need be tested for impairment annually.

Question 13

Hiawatha Bowline is a manufacturer of fixed-wing aircraft. They manufacture planes from small bush planes to larger corporate jets. Hiawatha Bowline has allocated goodwill to the small bush plane CGU. Two years ago, there were several defects in casting propeller blades which led to several crashes and bad publicity. At the end of the same year, the company determined that the goodwill was impaired (but not fully). This year, however, the defects have been worked out, and Hiawatha Bowline has, according to consumer ratings, the most reliable small bush plane on the market. Business is booming, and it is appropriate to reverse any impairment loss to goodwill per IAS 36.

Question 14

If the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount and this reduction is the impairment loss.

Question 15

Assets are grouped into cash-generating units for the purpose of impairment testing if they do not generate independent cash flows on their own.

Question 16

Impairment losses (except on goodwill) are required to be reversed, if certain criteria are met.

Question 17

Royal Sheffield Motorcycle has a motorcycle that it sells for military application which is branded Loyal Red. Royal Sheffield bought the brand during World War II. The British military has decided, however, to discontinue using the motorcycle, and Royal Sheffield believes that its Loyal Red brand of motorcycles may be impaired. Royal Sheffield estimates that during the first year, the Loyal Red brand should result in ₤50 million. The risk-free rate is 3.5 percent while the risk premium of the first year cash flows is 2.5 percent. However, there is considerably more variability in the second and final year of cash flows. For each ₤5 million in cash flows after the second year, there is an increase in the risk premium of 50 basis points. Estimated cash flows for year two are ₤25 million. Royal Sheffield's applicable tax rate is 35 percent. At the end of year two, Royal Sheffield estimates that it can sell Loyal Red for ₤10 million. What is the value in use of the Loyal Red Brand?

Question 18

Strawberry Fields Farms has four cash-generating units as follow:
a. Strawberry Farming: worth $4 million
b. Boysenberry Farming: worth $2.0 million
c. Raspberry Farming: worth $4.2 million
d. Blueberry Farming: worth $3.8 million
This year, Strawberry Fields Farms decided to move the company in a different direction. They decided to discontinue the boysenberry CGU due to low demand. They also decided to purchase John's Jams, which produces blueberry and raspberry preserves. $5 million in goodwill was accrued by Strawberry Fields Farms as a result. How should Strawberry Fields Farms allocate the goodwill amongst its CGUs?

Question 19

Refer to question 2. Assume that John's Jams produces boysenberry jam in addition to its blueberry and raspberry jams. Also assume that SFF purchased John's Jams on January 1 and that the boysenberry CGU was discontinued on December 31 of the same year. How would the goodwill be allocated to the CGUs under these circumstances?

Question 20

Refer to questions 2 and 3. Assume the same facts as question 3. On December 31, when Strawberry Fields Farms discontinues the Boysenberry CGU, how much of a loss will SFF sustain assuming that a separate company paid the bargain price of $200,000 for the CGU?

Question 21

On July 1, 20X7 Malta Entity (ME) acquired a shopping mall for $1,000,000. The mall has 20 tenants. ME uses the cost model to account for the mall. ME management decided to depreciate the mall on a straight-line method over 20 years with no residual value. On December 31, 20X9 due to significant adverse changes in the economic environment, the fair value of the shopping center decreased to $750,000; costs to sell are $30,000. The discounted net present value of expected cash flows from this building is $690,000. What is the recoverable amount?

Question 22

Define the term, "recoverable amount."

Question 23

Define the term, "value in use."

Question 24

List three common external indicators of impairment.

Question 25

List two common internal indicators of impairment.