Deck 12: Long-Term Operating Assets: Departures From Historical Cost

Question 1

After recognizing the impairment of property, plant and equipment, the firm carries the asset at its fair value less previously accumulated depreciation.

Answer 1

False

Question 2

Firms assess property, plant and equipment for impairment ________.

A) as individual assets only
B) in asset groups only
C) as either individual assets or in asset groups
D) as both individual assets and in asset groups

Answer 2

C

Question 3

When testing property, plant, equipment, and finite-life intangible assets for impairment, a firm must assess them as individual assets.

Answer 3

False

Question 4

The first step of the impairment test for property, plant and equipment is assessing asset recoverability.

Question 5

When a long-term operating asset is impaired, the firm reduces the asset's carrying value on the balance sheet and recognizes the decline in value ________.

A) as a loss from continuing operations on the income statement
B) as an extraordinary loss on the income statement
C) as an unrealized loss in other comprehensive income
D) as a realized loss in other comprehensive income

Question 6

When a long-term operating asset is impaired, the firm will determine a new carrying amount based upon its expectation of future economic benefits.

Question 7

The impairment loss for property, plant and equipment equals carrying value less fair value.

Question 8

Before testing property, plant, and equipment (PPE) and finite-life intangible (FLI) assets, ________.

A) the firm will assess PPE as individual assets and FLI assets in asset groups
B) the firm will assess PPE in asset groups and FLI assets as individual assets
C) the firm will assess both PPE and FLI assets in asset groups
D) the firm will assess both PPE and FLI assets as individual assets or in asset groups

Question 9

When assessing the impairment of property, plant and equipment, fair value is also referred to as replacement cost.

Question 10

One example of an impairment indicator for property, plant and equipment is a significant adverse change in legal factors that affect the value of an asset or asset group.

Question 11

All of the following are key steps related to accounting for impairments of long-term operating assets except ________.

A) asset grouping
B) measurement subsequent to impairment
C) derecognition of impairment
D) testing for impairment

Question 12

An impairment occurs when a long-term operating asset's carrying value falls below its total future cash-generating ability.

Question 13

List the four key steps related to accounting for impairments of long-term operating assets.

Question 14

Firms conduct an impairment test whenever impairment indicators indicate that property, plant and equipment or finite-life intangibles may be impaired.

Question 15

One example of an impairment indicator for property, plant and equipment is a significant increase in the market price of an asset or asset group.

Question 16

When assessing property, plant and equipment for impairment in asset groups, the firm groups assets at the lowest level of identifiable and independent cash flows.

Question 17

When an impairment occurs, the firm recognizes a loss on the income statement.

Question 18

U.S. GAAP allows for subsequent reversals of write-downs for long-term operating assets held for use in operations.

Question 19

The method of accounting for the impairment of long-term assets depends upon the type of loss that occurs.

Question 20

Impairment of a long-term operating asset occurs when ________.

A) the carrying value of the asset is systematically reduced over its useful economic life
B) there is a failure to meet the legal obligations or conditions of a loan by which that asset was acquired
C) an asset or part of an asset is removed from the asset portfolio
D) an asset's total future cash-generating ability falls below its carrying value

Question 21

In 2011, Yondoor Inc. Company acquired production machinery which now has a book value of $750,000. The sum of undiscounted future cash flows from use of the machinery is $370,000. and it's fair value is $305,000. Yondoor has determined that an impairment loss has occurred. What is the carrying value of the machinery after the journal entry to record the impairment loss has been recorded?

A) $445,000
B) $380,000
C) $370,000
D) $305,000

Question 22

If impairment indicators suggest that property, plant and equipment might be impaired, the firm then performs a ________.

A) one-step impairment test
B) two-step impairment test
C) three-step impairment test
D) four-step impairment test

Question 23

List four impairment indicators for long-term operating assets.

Question 24

In 2009, Cilla Company acquired production machinery at a cost of $470,000, which now has accumulated depreciation of $280,000. The sum of undiscounted future cash flows from use of the machinery is $120,000 and its fair value is $164,000. What amount should Cilla recognize as a loss on impairment?

A) $70,000
B) $96,000
C) $26,000
D) $0

Question 25

In 2017, Yumster Company determined that a production machine used in its operations was impaired and an impairment loss of $110,000 was recognized. In 2017, the fair value of the asset increased by $170,000 due to an unexpected resurgence in demand for the products the machine was designed to produce. How would the gain due to increase in fair value be recognized in 2017?

A) U.S. GAAP permits the recognition of this impairment reversal as income from continuing operations.
B) U.S. GAAP permits the recognition of this impairment reversal as other comprehensive income.
C) U.S. GAAP allows the recognition of this impairment reversal as either income from continuing operations or as other comprehensive income, depending upon management's intent.
D) U.S. GAAP does not permit recognition of gains on reversal of previous impairment loss write-downs.

Question 26

Doowow Chemical Company determines that an extruder machine used in its operations has suffered an impairment in value because of technological changes. An entry to record the impairment should include ________.

A) a debit to the machinery accumulated depreciation account
B) a debit to the machinery account
C) a credit to machinery depreciation expense account
D) a credit to the loss on impairment account

Question 27

Which of the following is an impairment indicator for property, plant and equipment?

A) a significant decrease in the purchase price of an asset or asset group scheduled to be acquired in the current period
B) a significant adverse change in legal factors that could affect the value of the asset or asset group
C) a significant increase in the purchase price of an asset or asset group scheduled to be acquired in the current period
D) a significant increase in the market price of an asset or asset group

Question 28

Ponzi Printing Company determines that a printing machine used in its operations has suffered an impairment in value because of technological changes. An entry to record the impairment should include a credit to ________.

A) the machinery accumulated depreciation account
B) the loss on impairment account
C) the machinery account
D) the machinery depreciation expense account

Question 29

Which of the following statements is true about assessing recoverability of property, plant and equipment?

A) If the sum of the undiscounted future cash flows exceeds the carrying value of the asset, then the asset is impaired.
B) If the sum of the discounted future cash flows exceeds the carrying value of the asset, then the asset is impaired.
C) If the sum of the undiscounted future cash flows exceeds the carrying value of the asset, then the asset is not impaired.
D) If the sum of the discounted future cash flows exceeds the carrying value of the asset, then the asset is not impaired.

Question 30

In 2011, Zee Tee Inc. acquired production machinery at a cost of $630,000, which now has a accumulated depreciation of $380,000. The sum of undiscounted future cash flows from use of the machinery is $260,000. and its fair value is $195,000. What amount should Zee Tee recognize as a loss on impairment?

A) $325,000
B) $55,000
C) $30,000
D) -0-

Question 31

Starburst Manufacturing reports the following long-term assets for its lighting division: $$\begin{array} { | l | r | r | } \hline & \text { Carrying value } & \text { Estimated fair value } \\\hline \text { Factory building (shared with other divisions) } & \$ 2,500,000 & \\\hline \text { Less: Accumulated depreciation } & ( 1,000,000) & \\\hline \text { Net book value } & \$ 1,500,000 & \$ 3,800,000 \\\hline \text { Land } & \$ 1,750,000 & \$ 3,500,000 \\\hline \text { Manufacturing equipment for lighting division } & \$ 525,000 & \\\hline \text { Less: Accumulated depreciation } & \$ 150,000 & \\\hline \text { Net book value } & \$ 375,000 &\$340,000 \\\hline \text { General factory equipment (used in several } & & \\\text { divisions) } & \$ 1,600,000 & \\\hline \text { Less: Accumulated depreciation } & \$ 900,000\\\hline \text { Net book value } & \$ 700,000 & \$ 650,000 \\\hline \text { Total net fixed assets } & \$ 4,325,000 & \\\hline\end{array}$$
As a result of new technology, Starburst believes that the lighting division's equipment in the manufacturing facility is nearly obsolete. They project the following future cash flows for the lighting division's operations:
Future period Cash-flow projection
Year 1 $50,000
Year 2 $35,000
Year 3 $20,000
Year 4 $12,000
Year 5 $6,000
For the purposes of impairment testing, which long-term assets will be used in the calculation of the loss?

A) all fixed assets
B) all fixed assets with the land excluded
C) manufacturing equipment for lighting division and general factory equipment
D) manufacturing equipment for lighting division

Question 32

Native Corporation has determined that one of its finite-life intangible assets is impaired. The asset's net carrying value on the date of impairment is $1,250,000. In order to estimate impairment, the company uses the discounted cash-flow model. The company projects the asset's future cash flows as follows:
$$\begin{array} { | c | c | } \hline \text { Future period } & \text { Cash-flow projection } \\\hline \text { Year 1 } & \$ 500,000 \\\hline \text { Year 2 } & \$ 350,000 \\\hline \text { Year 3 } & \$ 200,000 \\\hline \text { Year 4 } & \$ 120,000 \\\hline \text { Year 5 } & \$ 60,000 \\\hline\end{array}$$
Assuming a discount rate of 7%, what is the journal entry to record the loss?

Question 33

Starburst Manufacturing reports the following long-term assets for its lighting division: $\begin{array}{|l|r|r|} \hline& \text { Carrying value } & \begin{array}{c}\text { Estimated fair } \\\text { value }\end{array} \\\hline \text { Factory building (shared with other divisions) } & \$ 2,500,000 & \\\hline \text { Less: Accumulated depreciation } & (1,000,000 & \\\hline \text { Net book value } & \$ 1,500,000 & \$ 3,800,000 \\\hline \text { Land } & \$ 1,750,000 & \$ 3,500,000 \\\hline \text { Manufacturing equipment for lighting division } & \$ 525,000 & \\\hline \text { Less: Accumulated depreciation } &(150,000 )& \\\hline \text { Net book value } & \$ 375,000 & \$ 340,000 \\\hline \text { General factory equipment (used in several } & \\\text { divisions) } &\$ 1,600,000 & \\\hline \text { Less: Accumulated depreciation } &(900,000 ) \\\hline \text { Net book value } & \$ 700,000 & \$ 650,000\\\hline\text { Total net fixed assets }& \$ 4,325,000\\ \hline\end{array}$

As a result of new technology, Starburst believes that the lighting division's equipment in their manufacturing facility is nearly obsolete. They project the following future cash flows for the lighting division's operations:
Future period Cash-flow projection
Year 1 $50,000
Year 2 $35,000
Year 3 $20,000
Year 4 $12,000
Year 5 $6,000
What is the impairment loss, if any, for the appropriate asset group, assuming a discount rate of 8%? (Use spreadsheet software or a financial calculator to calculate your answer.)

A) $105,084
B) $269,916
C) $0
D) $375,000

Question 34

Native Corporation has determined that one of its finite-life intangible assets is impaired. The asset's net carrying value on the date of impairment is $1,250,000. In order to estimate impairment, the company uses the discounted cash-flow model. The company projects the asset's future cash flows as follows: $$\begin{array} { | c | c | } \hline \text { Future period } & \text { Cash-flow projection } \\\hline \text { Year 1 } & \$ 500,000 \\\hline \text { Year 2 } & \$ 350,000 \\\hline \text { Year 3 } & \$ 200,000 \\\hline \text { Year 4 } & \$ 120,000 \\\hline \text { Year 5 } & \$ 60,000 \\\hline\end{array}$$
Assuming a discount rate of 7%, which of the following is included in the journal entry to record the loss? (Use spreadsheet software or a financial calculator to calculate your answer.)

A) credit Impairment Loss on Intangible Asset $30,000
B) debit Accumulated Depreciation $179,421
C) debit Intangible Asset $30,000
D) credit Intangible Asset $179,421

Question 35

Which of the following statements regarding impairment testing of long-lived operating assets is false?

A) If the carrying value of the asset is greater than the sum of the undiscounted future cash flows, an impairment loss must be recognized.
B) The asset recoverability test compares the carrying value of the asset with its fair value.
C) The carrying value of the asset after adjustment for impairment loss is its fair value.
D) If impairment indicators are present, the company must conduct an impairment test.

Question 36

In 2010, Mennorah Corporation acquired production machinery at a cost of $490,000, which now has a book value of $200,000. The sum of undiscounted future cash flows from use of the machinery is $180,000, and it's fair value is $120,000. What amount should Mennorah recognize as a loss on impairment?

A) $370,000
B) $60,000
C) $80,000
D) -0-

Question 37

Which of the following is not an impairment indicator for property, plant and equipment?

A) a significant decrease in the purchase price of an asset or asset group scheduled to be acquired in the current period
B) a significant adverse change in legal factors that could affect the value of the asset or asset group
C) a current-period cash flow loss combined with a forecast of continuing losses associated with the use of an asset or asset group
D) a significant decrease in the market price of an asset or asset group

Question 38

In 2011, Diller Company acquired production machinery at a cost of $860,000, which now has a book value of $380,000. The sum of undiscounted future cash flows from use of the machinery is $335,000, and its fair value is $290,000.
a. Determine if an impairment loss has occurred. Explain.
b. If an impairment loss has occurred, provide the journal entry to record the impairment loss.

Question 39

In 2009, Cilla Company acquired production machinery at a cost of $414,000, which now has accumulated depreciation of $250,000. The sum of undiscounted future cash flows from use of the machinery is $199,000 and its fair value is $148,000. What amount should Cilla recognize as a loss on impairment?

A) $35,000
B) $51,000
C) $16,000
D) -0-

Question 40

In 2011, Zee Tee Inc. acquired production machinery at a cost of $650,000, which now has a accumulated depreciation of $390,000. The sum of undiscounted future cash flows from use of the machinery is $220,000. and its fair value is $194,000. What amount should Zee Tee recognize as a loss on impairment?

A) $324,000
B) $66,000
C) $40,000
D) -0-

Question 41

Companies should evaluate indefinite life intangible assets at least annually for ________.

A) amortization
B) derecognition
C) recoverability
D) impairment

Question 42

The journal entry to record an impairment loss for an indefinite-life intangible asset includes which of the following?

A) debit the intangible asset
B) credit the intangible asset
C) debit accumulated amortization for the asset
D) credit accumulated amortization for the asset

Question 43

Explain how gains or losses on impaired long-term operating assets should be reported in income. How should impairment losses be recorded?

Question 44

Firms associate goodwill with the group of net assets at the level of the operating segment or one level below the operating segment.

Question 45

U.S. GAAP allows companies to make a qualitative evaluation annually to determine whether it is more likely than not that a reporting unit's goodwill is impaired.

Question 46

Briefly describe the process for determining impairment losses on property, plant, and equipment and finite-life intangible assets.

Question 47

Devo Co. has an indefinite-life intangible asset with a carrying value of $800,000. The undiscounted future cash flows expected to be realized from that asset total $828,000; the discounted cash flows are $578,000; and the fair value of the asset has been determined to be $647,000. What is the amount of the impairment loss to be recorded, if any?

A) $222,000
B) $153,000
C) $28,000
D) -0-

Question 48

U.S. GAAP does not permit subsequent reversals of impairment losses for indefinite-life intangible assets.

Question 49

U.S. GAAP requires that firms must perform an annual impairment test of indefinite-life assets.

Question 50

Impairment testing is conducted annually for both limited-life and indefinite-life intangible assets.

Question 51

Impairment testing for goodwill is the same as impairment tests for other indefinite-life assets.

Question 52

How do the standards specifying when to test for impairment for indefinite-life intangible assets differ from those standards for finite-life intangible assets?

Question 53

What is the nature of the recoverability test for indefinite-life intangible assets?

A) Is the carrying value of the asset greater than the sum of undiscounted future cash flows generated by the asset?
B) Is the carrying value of the asset greater than the sum of future discounted cash flows generated by the asset?
C) Is the carrying value of the asset greater than the fair value of the asset?
D) There is no recoverability test for indefinite-life intangible assets.

Question 54

Devo Co. has an indefinite-life intangible asset with a carrying value of $783,000. The undiscounted future cash flows expected to be realized from that asset total $830,000; the discounted cash flows are $574,000; and the fair value of the asset has been determined to be $657,000. What is the new carrying value of the asset after the impairment loss has been recorded?

A) $830,000
B) $657,000
C) $574,000
D) $126,000

Question 55

U.S. GAAP requires that firms combine indefinite-life intangibles into an asset grouping if they are operated as a single asset.

Question 56

All intangibles are subject to periodic consideration of impairment with corresponding potential write-downs.

Question 57

After assessing qualitative factors to determine whether it is necessary to perform the quantitative impairment test for indefinite-life intangibles, the firm will proceed with determining fair value if impairment is deemed reasonably possible.

Question 58

For which of the following does U.S. GAAP permit recognition of recovery of impairment?

A) machinery used in operations
B) patents held for use
C) goodwill
D) none of these

Question 59

A loss on impairment of an indefinite-life intangible asset is the difference between the asset's ________.

A) recoverable amount and the expected future net cash flows
B) book value and its fair value
C) carrying amount and its recoverable amount
D) carrying amount and the expected future net cash flows

Question 60

Determining the amount of goodwill impairment is a one-step impairment test.

Question 61

An impairment loss for goodwill is calculated as the difference between ________.

A) the implied fair value of goodwill and its book value
B) the fair value of the reporting unit (including goodwill) and the fair value of its net assets (without goodwill)
C) the book value of the reporting unit (including goodwill) and the book value of its net assets (without goodwill)
D) the fair value of the reporting unit (including goodwill) and the book value of the reporting unit (including goodwill)

Question 62

U.S. GAAP does not permit subsequent reversals of goodwill impairment losses.

Question 63

Regular Corp. has four divisions. One of them, Weeble Products, was acquired on January 1, 2016, for $80,000,000, and recorded goodwill of $7,000,000 as a result of that purchase. Weeble Products is considered to be a reporting unit. At December 31, 2017, Weeble Products had a fair value (including goodwill) of $38,000,000, and the book value of the division's net assets (including goodwill) was $46,000,000. What amount of loss on impairment of goodwill should Regular record in 2017?

A) -0-
B) $7,000,000
C) $8,000,000
D) $15,000,000

Question 64

For purposes of goodwill impairment evaluation, which of the following is not a characteristic of an operating segment of a public entity as defined in the Codification?

A) It engages in business activities from which it may earn revenues and incur expenses.
B) The segment has produced net profits for at least three of the last five operating cycles.
C) The entity's chief decision maker regularly reviews the performance of the segment.
D) The segment's discrete financial information is available.

Question 65

IFRS allows firms to reverse impairment loss write-downs on property, plant, and equipment but not on finite-life intangible assets.

Question 66

Stanvid Company provided the following information:
Fair value of the reporting unit, including goodwill $\quad$ $\quad$ $1,400,000
Book value of reporting unit, excluding goodwill $\quad$ $\quad$ $\quad$ $1,000,000
Add: Carrying value of goodwill $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ 600,000
Carrying value of the reporting unit, including goodwill $\quad$ $1,600,000


The qualitative assessment of goodwill is completed and it is more likely than not that goodwill is impaired. Describe the process for determining if Stanvid needs to record a goodwill impairment loss and prepare any required journal entries.

Question 67

Under IFRS, when recording an impairment loss for a long-term operating asset, the firm eliminates the balance in the accumulated depreciation or accumulated amortization account, and then reduces the asset account.

Question 68

Under the IFRS one-step impairment test, a long-term operating asset's recoverable value is its fair value or its value in use, whichever is lower.

Question 69

Regular Corp. has four divisions. One of them, Yulon Products, was acquired on January 1, 2016, for $89,000,000, and recorded goodwill of $9,000,000 as a result of that purchase. Yulon Products is a reporting unit of the company. At December 31, 2017, Yulon Products had a fair value (including goodwill) of $68,000,000. The book value of the division's net assets (including goodwill) at December 31, 2017 was $79,000,000. What was the impairment loss for goodwill at December 31, 2017?

A) $79,000,000
B) $11,000,000
C) $9,000,000
D) $0

Question 70

Under IFRS, firms report a reversal of an impairment loss on long-term operating assets as other comprehensive income.

Question 71

IFRS impairment testing for finite-life intangible assets is similar to impairment testing for tangible long-lived assets.

Question 72

Using IFRS for indefinite-life intangibles, impairment must be tested at least annually, even in the absence of indicators.

Question 73

When determining the amount of goodwill impairment, the fair value of the reporting unit is its exit price.

Question 74

Stanvid Company provided the following information:
Fair value of the reporting unit, including goodwill $\quad$ $\quad$ $1,400,000
Fair value of the reporting unit, excluding goodwill $\quad$ $\quad$ $1,200,000
Book value of reporting unit, excluding goodwill $\quad$ $\quad$ $\quad$ $1,000,000
Add: Carrying value of goodwill $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ 350,000
Carrying value of the reporting unit, including goodwill $\quad$ $\quad$ $1,350,000

The qualitative assessment of goodwill is completed and it is more likely than not that goodwill is impaired. Describe the process for determining if Stanvid needs to record a goodwill impairment loss and prepare any required journal entries.

Question 75

After an impairment loss is recorded for goodwill, what is the basis for the impaired asset?

A) the recoverable amount
B) the fair value
C) undiscounted expected cash flows
D) discounted expected cash flows

Question 76

Under IFRS, the firm may base an impairment test for an asset group called a reporting unit.

Question 77

Under IFRS for impairment testing, the smallest identifiable group of assets that provides cash inflows is called a(n) ________.

A) reporting unit
B) operating unit
C) cash-providing unit
D) cash-generating unit

Question 78

Asset grouping for impairment testing of long-term operating assets is similar under U.S. GAAP and IFRS.

Question 79

Regular Corp. has four divisions. One of them, Zolo Products, was acquired on January 1, 2016, for $400,000,000, and recorded goodwill of $50,000,000 as a result of that purchase. At December 31, 2016, Zolo Products had a fair value (including goodwill) of $379,000,000. The carrying value of the company's net assets at December 31, 2016 was $356,000,000 (including goodwill). What amount of loss on impairment of goodwill should Regular record in 2016?

A) $21,000,000
B) $44,000,000
C) $23,000,000
D) -0-

Question 80

Under IFRS, impairment tests are more frequent for PPE and finite-life intangible assets than for indefinite-life intangible assets.