Reading 37: Long-Lived Assets LOSi习题精选 impaired, tangible, statements, 2010

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LOS i: Define impairment of long-lived tangible and intangible assets and explain what effect such impairment has on a company’s financial statements and ratios.

An asset is impaired when:

A) accumulated depreciation plus salvage value exceeds acquisition costs.

B) the present value of future cash flows exceeds the carrying amount of the asset.

C) the firm can no longer fully recover the carrying amount of the asset.

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An asset is impaired if its future cash flows (undiscounted) are less than its carrying value.

 

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An analyst determined the following information concerning Franklin, Inc.’s stamping machine:

• Acquired seven years ago for $22 million
• Straight line method used for depreciation
• Useful life estimated to be 12 years
• Salvage value originally estimated to be $4 million

The stamping machine is expected to generate $1,500,000 per year for five more years and will then be sold for $1,000,000. The stamping machine is:

A) not impaired.

B) impaired because expected salvage value has declined.

C) impaired because its carrying value exceeds expected future cash flows.

The carrying value of the stamping machine is its cost less accumulated depreciation. Depreciation taken through 7 years was ($22,000,000 - $4,000,000) / 12 × 7 = $10,500,000, so carrying value is $22,000,000 - $10,500,000 = $11,500,000. Because the $11,500,000 carrying value is more than expected future cash flows of (5 × $1,500,000) + $1,000,000 = $8,500,000, the stamping machine is impaired.

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Lakeside Co. recently determined that one of its processing machines has become obsolete three years early and, unexpectedly, has no salvage value. Which of the following statements is most consistent with this discovery?

A) Historically, economic depreciation was overstated.

B) Historically, economic depreciation was understated.

C) Lakeside Co. will owe back taxes.

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Historically, economic depreciation was understated. If an asset becomes obsolete and its useful life is less than expected, accounting methods for depreciation will understate the economic depreciation. In addition, if there is no salvage value when positive salvage value was expected, the understatement problem is compounded.

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As part of a major restructuring of business units, General Security (an industrial conglomerate operating solely in the U.S. and subject to U.S. GAAP) recognizes significant impairment losses. The Investor Relations group is preparing an informational packet for shareholders, employees, and the media. Which of the following statements is least accurate?

A) Write-downs taken on asset values can be reversed in later years if market conditions improve.

B) The write-downs are reported as a component of income from continuing operations.

C) During the year of the write-downs, retained earnings and deferred taxes will decrease.

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Impairments cannot be restored under U.S. GAAP. Both remaining statements are correct.

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An impairment write-down is least likely to decrease a company's:

A) debt-to-equity ratio.

B) assets.

C) future depreciation expense.

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An impairment write-down reduces equity and has no effect on debt. The debt-to- equity ratio would therefore increase.

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Taking an impairment of long-lived assets will result in:

A) increased future ROA.

B) increased deferred tax liabilities.

C) decreased debt/equity ratio.

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In future years, less depreciation expense is recognized on the written-down asset resulting in higher net income and return on assets since ROA = NI/Total Assets. Deferred tax liabilities related to the asset decrease because the impairment cannot be deducted from taxable income until the asset is sold or disposed of. The debt/equity ratio increases because equity decreases while debt is unchanged.

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Selected information from Ingot Company’s financial statements for the year ended December 31, 20X4, was as follows prior to the consideration of its impaired asset write-down (in $):

Cash	120,000		Short-term Debt	290,000
Accounts Receivable	200,000		Long-term Debt	740,000
Inventory	300,000		Common Stock	800,000
Property Plant & Eq. (net)	1,700,000		Retained Earnings	490,000
	2,320,000			2,320,000

Ingot Company’s excavation machine is permanently impaired. Its purchase price was $1,600,000 and its accumulated depreciation was $800,000 through 20X4. The present value of its future cash flows is $500,000.

The write-down of the excavation machine will cause Ingot’s total debt ratio (total debt-to-total capital) to:

A) decrease from 0.44 to 0.40.

B) increase from 0.44 to 0.51.

C) increase from 0.44 to 0.48.

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The write-down of the excavation machine in the amount of ((($1,600,000 ? $800,000) ? $500,000) =) $300,000 decreases retained earnings from $490,000 to $190,000. The total debt to equity ratio increases from (($290,000 + $740,000) / ($290,000 + $740,000 + $800,000 + $490,000) =) 0.44 to (($290,000 + $740,000) / ($290,000 + $740,000 + $800,000 + $190,000) =) 0.51.

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