Question 1

Wheaton Company Wheaton Company owns an apartment building that originally cost $40 million and by the end of the current period has accumulated depreciation of $10 million, with net carrying value of $30 million.Wheaton Company had originally expected to collect rentals of $3.34 million each year for 30 years before selling the building for $16 million.Unanticipated placement of a new shopping center has caused Wheaton Company to reassess the future rentals.Wheaton Company expects the building to provide rentals for only 15 more years before Wheaton will sell it.Wheaton Company uses a discount rate of 8% per year in discounting expected rentals from the building.
Wheaton now expects to receive annual rentals of $1,200,000 per year for 15 years and to sell the building for $6.0 million after 15 years; these payments, in total, have a present value of $12.2 million when discounted at 8% per year.The building's fair value is $11.0 million today and costs to sell are $600,000.
Applying IFRS, Wheaton would record the following entry
A)Accumulated Depreciation ........................... 11,000,000 
Apartment Building (New Valuation) ....................10,000,000
Loss on Impairment................................. 19,000,000
Apartment Building (Acquisition Cost) ......................... 40,000,000
B)Accumulated Depreciation ........................... 10,000,000 
Apartment Building (New Valuation) ....................10,000,000
Loss on Impairment................................. 20,000,000
Apartment Building (Acquisition Cost) ......................... 40,000,000
C)Accumulated Depreciation ........................... 10,000,000 
Apartment Building (New Valuation) ...................11,000,000
Loss on Impairment................................. 19,000,000
Apartment Building (Acquisition Cost) ......................... 40,000,000
D)Accumulated Depreciation ........................... 10,000,000 
Apartment Building (New Valuation) ...................12,000,000
Loss on Impairment................................. 18,000,000
Apartment Building (Acquisition Cost) ......................... 40,000,000
E)Accumulated Depreciation ........................... 10,000,000 
Apartment Building (New Valuation) ...................12,200,000
Loss on Impairment................................. 17,800,000
Apartment Building (Acquisition Cost) ......................... 40,000,000

Accepted Answer

The correct answer is E because it correctly records the impairment loss of $17,800,000, which is the difference between the carrying amount of $30,000,000 and the fair value of $12,200,000.

Question 2

Under U.S.GAAP and IFRS reporting standards, management assesses the firm's assets for impairment at each reporting date by determining if impairment indicators are present.Impairment indicators include
A)the decline in the market value of an asset significantly beyond what would be expected because of use or the passage of time.
B)significant adverse changes in the entity's technological environment.
C)significant adverse changes in the entity's economic environment.
D)significant adverse changes in the entity's legal environment.
E)all of the above

Accepted Answer

Under U.S.GAAP and IFRS reporting standards, impairment indicators include a decline in the market value of an asset significantly beyond what would be expected because of use or the passage of time, significant adverse changes in the entity's technological environment, significant adverse changes in the entity's economic environment, and significant adverse changes in the entity's legal environment. Therefore, all of the above options are impairment indicators that management must consider during the assessment of the firm's assets for impairment at each reporting date.

Question 3

Macon Company Macon Company owns an apartment building that originally cost $40 million and by the end of the current period has accumulated depreciation of $10 million, with net carrying value of $30 million.Macon Company had originally expected to collect rentals of $3.34 million each year for 30 years before selling the building for $16 million.Unanticipated placement of a new shopping center has caused Macon Company to reassess the future rentals.Macon Company expects the building to provide rentals for only 15 more years before Macon will sell it.Macon Company uses a discount rate of 8% per year in discounting expected rentals from the building.
Macon now expects to receive annual rentals of $2.7 million per year for 15 years and to sell the building for $10.0 million after 15 years; these payments, in total, have a present value of $26.2 million when discounted at 8% per year.The building's fair value is $25 million today.Costs to sell are estimated at $1,000,000.
Using the Macon Company data, the application of IFRS indicates:
A)no impairment loss has occurred.
B)an impairment loss has occurred in the amount of $3.8 million.
C)an impairment loss has occurred in the amount of $6 million.
D)an impairment gain has occurred in the amount of $6 million.
E)an impairment gain has occurred in the amount of $3.8 million.

Accepted Answer

Under IFRS, an impairment loss should be recognized if the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset's fair value less costs to sell and its value in use. In this case, the apartment building's carrying amount is $30 million, which exceeds its recoverable amount of $26.2 million. Therefore, an impairment loss of $3.8 million ($30 million - $26.2 million) should be recognized.

Note that the fact that the building's fair value is $25 million is not relevant for impairment testing under IFRS, as the recoverable amount is based on the higher of fair value less costs to sell and value in use.

Question 4

U.S.GAAP or IFRS require firms to test
A)annually for impairment losses on goodwill.
B)whenever there is an indication of impairment due to changes in the legal or economic climate.
C)whenever there is an indication of impairment due to adverse regulatory conditions.
D)whenever there is an indication of impairment due to loss of key personnel.
E)all of the above

Accepted Answer

Both U.S. GAAP and IFRS require firms to test annually for impairment losses on goodwill (A) and also to test for impairment whenever there is an indication that an asset may be impaired, which could be due to changes in the legal or economic climate (B), adverse regulatory conditions (C), or loss of key personnel (D). These indicators are not exhaustive but represent common reasons that might lead a firm to believe an asset's carrying amount may not be recoverable.

Question 5

An impairment loss on a trademark arises when
A)the book value of the trademark exceeds the undiscounted cash flows.
B)the book value of the trademark exceeds the market value.
C)the market value of the trademark exceeds the undiscounted cash flows.
D)the book value of the trademark exceeds the discounted cash flows.
E)the book value of the trademark exceeds the net realizable value.

Accepted Answer

An impairment loss occurs when the carrying amount (book value) of an asset exceeds its recoverable amount, which is often represented by its market value.

Question 6

U.S.GAAP and IFRS distinguish three categories of long-lived assets for purposes of measuring and recognizing impairment losses.The second category addresses intangibles, other than goodwill, not subject to amortization. This category does not include:
A)brand names.
B)trademarks.
C)franchise rights.
D)renewable licenses.
E)none of the above

Accepted Answer

The answer of U.S.GAAP and IFRS distinguish three categories of...

Question 7

Applying IFRS, the test for an impairment loss for long-lived assets other than nonamortized intangibles and goodwill compares the balance sheet carrying value with the asset's
A)recoverable amount.
B)sum of the undiscounted cash flows.
C)sum of the discounted cash flows.
D)expected future value.
E)fair market value.

Accepted Answer

According to IFRS, the test for impairment loss for long-lived assets (other than nonamortized intangibles and goodwill) is to compare the carrying value with the recoverable amount, which is the higher of the asset's fair value less costs to sell and its value in use. Therefore, choice A is the correct answer.

Question 8

An impairment loss on all assets except intangibles that do not require amortization arises when
A)the book value of the assets exceed the undiscounted cash flows.
B)the book value of the assets exceed the market value.
C)the market value of the assets exceed the undiscounted cash flows.
D)the book value of the assets exceed the discounted cash flows.
E)the book value of the assets exceed the liquidation value.

Accepted Answer

An impairment loss occurs when the book value of an asset exceeds the undiscounted cash flows expected from its use and eventual disposal.

Question 9

U.S.GAAP requires firms to recognize an impairment loss on a nonamortized intangible other than goodwill whenever the carrying value of the asset exceeds its
A)undiscounted cash flows less cost to sell.
B)replacement cost less cost to sell.
C)undiscounted cash flows.
D)present value of future cash flows.
E)fair value.

Accepted Answer

Under U.S. GAAP, firms are required to recognize an impairment loss on a nonamortized intangible asset other than goodwill when its carrying amount exceeds its fair value. This is a test to determine if the asset is impaired, and if so, to measure the amount of impairment loss to be recognized.

Question 10

Wheaton Company Wheaton Company owns an apartment building that originally cost $40 million and by the end of the current period has accumulated depreciation of $10 million, with net carrying value of $30 million.Wheaton Company had originally expected to collect rentals of $3.34 million each year for 30 years before selling the building for $16 million.Unanticipated placement of a new shopping center has caused Wheaton Company to reassess the future rentals.Wheaton Company expects the building to provide rentals for only 15 more years before Wheaton will sell it.Wheaton Company uses a discount rate of 8% per year in discounting expected rentals from the building.
Wheaton now expects to receive annual rentals of $1,200,000 per year for 15 years and to sell the building for $6.0 million after 15 years; these payments, in total, have a present value of $12.2 million when discounted at 8% per year.The building's fair value is $11.0 million today and costs to sell are $600,000.
Under U.S.GAAP, Wheaton would record the following entry
A)Accumulated Depreciation ........................... 11,000,000 
Apartment Building (New Valuation) ....................10,000,000
Loss on Impairment................................. 19,000,000
Apartment Building (Acquisition Cost) ......................... 40,000,000

B)Accumulated Depreciation ........................... 10,000,000 
Apartment Building (New Valuation) ....................10,000,000
Loss on Impairment................................. 20,000,000
Apartment Building (Acquisition Cost) ......................... 40,000,000

C)Accumulated Depreciation ........................... 10,000,000 
Apartment Building (New Valuation) ...................11,000,000
Loss on Impairment................................. 19,000,000
Apartment Building (Acquisition Cost) ......................... 40,000,000

D)Accumulated Depreciation ........................... 10,000,000 
Apartment Building (New Valuation) ...................12,000,000
Loss on Impairment................................. 18,000,000
Apartment Building (Acquisition Cost) ......................... 40,000,000

E)Accumulated Depreciation ........................... 10,000,000 
Apartment Building (New Valuation) ...................12,200,000
Loss on Impairment................................. 17,800,000
Apartment Building (Acquisition Cost) ......................... 40,000,000

Accepted Answer

The correct entry reflects the reduction of the apartment building's carrying amount to its fair value less costs to sell. The carrying amount is $30 million (original cost of $40 million less accumulated depreciation of $10 million). The fair value less costs to sell is $10.4 million ($11 million fair value - $0.6 million costs to sell). The loss on impairment is the difference between the carrying amount and the fair value less costs to sell, which is $19.6 million ($30 million - $10.4 million). However, the closest option that reflects the accounting treatment under U.S. GAAP, given the provided choices, is option C, which adjusts the accumulated depreciation to reflect the impairment loss and reduces the carrying amount of the asset to its new fair value of $11 million, recognizing a loss on impairment to account for the decrease in value.

Question 11

Under U.S.GAAP and IFRS reporting standards, management assesses the firm's assets for impairment at each reporting date by determining if impairment indicators are present.Impairment indicators do not include
A)the decline in the market value of an asset significantly beyond what would be expected because of use or the passage of time.
B)significant adverse changes in the entity's technological environment.
C)significant adverse changes in the entity's economic environment.
D)significant adverse changes in the entity's legal environment.
E)significant adverse changes in the entity's Chief Executive Officer's health.

Accepted Answer

Impairment indicators focus on the asset, not on the CEO's health, and include the factors listed in choices A through D that could indicate that an asset's value has declined significantly and may need to be written down.

Question 12

The economic value of a tangible asset may decline below its book value but an impairment loss would not be recognized when the
A)undiscounted future cash flows exceed its book value.
B)undiscounted future cash flows exceed its market value.
C)discounted future cash flows exceed its book value.
D)discounted future cash flows exceed its market value.
E)discounted future cash flows exceed its liquidation value.

Accepted Answer

According to accounting standards, impairment loss is recognized when the recoverable amount of an asset (either its market value, discounted cash flows, or liquidation value) is less than its carrying amount (book value). However, if the undiscounted future cash flows of a tangible asset exceed its book value, it means that the asset is still capable of generating sufficient cash flows to recover the carrying amount, and therefore no impairment loss needs to be recognized.

Question 13

Loren Company's balance sheet shows a trade name acquired as part of a business combination with a carrying value of $30 million.The trade name has an indefinite life and therefore Loren does not amortize it.Negative publicity regarding the product carrying the trade name has reduced its fair value to $24 million and its value in use to $22 million.The entry is as follows:
A)Loss on Impairment ...................................8,000,000 
Trade Name ..............................................8,000,000

B)Loss on Impairment ...................................6,000,000 
Trade Name ..............................................6,000,000

C)Loss on Impairment ...................................4,000,000 
Trade Name ..............................................4,000,000

D)Trade Name ........................................6,000,000 
Loss on Impairment ........................................6,000,000

E)Trade Name ........................................8,000,000 
Loss on Impairment ........................................8,000,000

Accepted Answer

The entry should reflect the loss on impairment of the trade name. The difference between the carrying value of $30 million and the fair value of $24 million is $6 million, which represents the loss on impairment. Therefore, option B is the correct choice. Option A and E overstate the amount of the loss, while option C understates it. Option D is incorrect because it does not follow the correct accounting treatment for impairment losses.

Question 14

U.S.GAAP provisions require a three-step procedure for measuring and recording impairments for long-lived assets other than nonamortized intangibles and goodwill.An asset impairment loss arises when the carrying values of the assets
A)exceed the sum of the discounted cash flows.
B)exceed the sum of the undiscounted cash flows.
C)exceed the replacement cost.
D)exceed the fair market value less cost to sell.
E)exceed the fair market value.

Accepted Answer

Under U.S. GAAP, an impairment loss for long-lived assets (other than nonamortized intangibles and goodwill) is recognized when the carrying amount of the asset is not recoverable and exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.

Question 15

An impairment loss on all intangibles that do not require amortization, except goodwill, arises when
A)the book value of the assets exceed the undiscounted cash flows.
B)the book value of the assets exceed the market value.
C)the market value of the assets exceed the undiscounted cash flows.
D)the book value of the assets exceed the discounted cash flows.
E)the book value of the assets exceed the liquidation value.

Accepted Answer

The book value of the assets exceeds the market value.

Question 16

Wheaton Company Wheaton Company owns an apartment building that originally cost $40 million and by the end of the current period has accumulated depreciation of $10 million, with net carrying value of $30 million.Wheaton Company had originally expected to collect rentals of $3.34 million each year for 30 years before selling the building for $16 million.Unanticipated placement of a new shopping center has caused Wheaton Company to reassess the future rentals.Wheaton Company expects the building to provide rentals for only 15 more years before Wheaton will sell it.Wheaton Company uses a discount rate of 8% per year in discounting expected rentals from the building.
Wheaton now expects to receive annual rentals of $1,200,000 per year for 15 years and to sell the building for $6.0 million after 15 years; these payments, in total, have a present value of $12.2 million when discounted at 8% per year.The building's fair value is $11.0 million today and costs to sell are $600,000.
Under U.S.GAAP, Wheaton recognizes
A)no impairment loss.
B)an impairment loss of $17.8 million.
C)an impairment loss of $19.0 million.
D)an impairment loss of $18.7 million.
E)an impairment loss of $30.0 million.

Accepted Answer

Under U.S.GAAP, a company tests for impairment when it is more likely than not that the carrying amount of an asset is not recoverable. A company must recognize impairment loss if the carrying amount of the asset exceeds its fair value. In this case, the carrying amount of the building is $30 million, and its fair value is $11 million. Thus, Wheaton must recognize an impairment loss of $19 million ($30 million - $11 million).

Question 17

Macon Company Macon Company owns an apartment building that originally cost $40 million and by the end of the current period has accumulated depreciation of $10 million, with net carrying value of $30 million.Macon Company had originally expected to collect rentals of $3.34 million each year for 30 years before selling the building for $16 million.Unanticipated placement of a new shopping center has caused Macon Company to reassess the future rentals.Macon Company expects the building to provide rentals for only 15 more years before Macon will sell it.Macon Company uses a discount rate of 8% per year in discounting expected rentals from the building.
Macon now expects to receive annual rentals of $2.7 million per year for 15 years and to sell the building for $10.0 million after 15 years; these payments, in total, have a present value of $26.2 million when discounted at 8% per year.The building's fair value is $25 million today.Costs to sell are estimated at $1,000,000.
Using the Macon Company data, under U.S.GAAP:
A)no impairment loss has occurred.
B)an impairment loss has occurred in the amount of $3.8 million.
C)an impairment loss has occurred in the amount of $6 million.
D)an impairment gain has occurred in the amount of $6 million.
E)an impairment gain has occurred in the amount of $3.8 million.

Accepted Answer

The answer of Macon Company Macon Company owns an apartment...

Question 18

Wheaton Company Wheaton Company owns an apartment building that originally cost $40 million and by the end of the current period has accumulated depreciation of $10 million, with net carrying value of $30 million.Wheaton Company had originally expected to collect rentals of $3.34 million each year for 30 years before selling the building for $16 million.Unanticipated placement of a new shopping center has caused Wheaton Company to reassess the future rentals.Wheaton Company expects the building to provide rentals for only 15 more years before Wheaton will sell it.Wheaton Company uses a discount rate of 8% per year in discounting expected rentals from the building.
Wheaton now expects to receive annual rentals of $1,200,000 per year for 15 years and to sell the building for $6.0 million after 15 years; these payments, in total, have a present value of $12.2 million when discounted at 8% per year.The building's fair value is $11.0 million today and costs to sell are $600,000.
Under IFRS, Wheaton recognizes
A)no impairment loss.
B)an impairment loss of $17.8 million.
C)an impairment loss of $19.0 million.
D)an impairment loss of $18.7 million.
E)an impairment loss of $30.0 million.

Accepted Answer

The answer of Wheaton Company Wheaton Company owns an apartment...

Question 19

An impairment loss on a brand name arises when
A)the book value of the brand name exceeds the undiscounted cash flows.
B)the book value of the brand name exceeds the market value.
C)the market value of the brand name exceeds the undiscounted cash flows.
D)the book value of the brand name exceeds the discounted cash flows.
E)the book value of the brand name exceeds the liquidation value.

Accepted Answer

The answer of An impairment loss on a brand name...

Question 20

Evers Company's balance sheet shows a trade name acquired as part of a business combination with a carrying value of $60 million.The trade name has an indefinite life and therefore Evers does not amortize it.Negative publicity regarding the product carrying the trade name has reduced its fair value to $48 million and its value in use to $44 million.The entry is as follows:
A)Loss on Impairment ..................................16,000,000 
Trade Name ............................................16,000,000

B)Loss on Impairment ...................................12,000,000 
Trade Name ............................... .............12,000,000

C)Loss on Impairment ...................................8,000,000 
Trade Name ..............................................8,000,000

D)Trade Name ........................................12,000,000 
Loss on Impairment .......................................12,000,000

E)Trade Name ........................................16,000,000 
Loss on Impairment ...................................... .16,000,000

Accepted Answer

According to the information provided, the fair value of the trade name has decreased to $48 million, which is $12 million less than its carrying value of $60 million. Therefore, a loss on impairment of $12 million should be recognized, and the carrying value of the trade name should be reduced to $48 million. Choice B correctly reflects this entry.

Quiz 10: Long-Lived Tangible and Intangible Assets

Under U.S.GAAP and IFRS reporting standards, management assesses the firm's assets for impairment at each reporting date by determining if impairment indicators are present.Impairment indicators include

U.S.GAAP or IFRS require firms to test

An impairment loss on a trademark arises when

U.S.GAAP and IFRS distinguish three categories of long-lived assets for purposes of measuring and recognizing impairment losses.The second category addresses intangibles, other than goodwill, not subject to amortization. This category does not include:

Applying IFRS, the test for an impairment loss for long-lived assets other than nonamortized intangibles and goodwill compares the balance sheet carrying value with the asset's

An impairment loss on all assets except intangibles that do not require amortization arises when

U.S.GAAP requires firms to recognize an impairment loss on a nonamortized intangible other than goodwill whenever the carrying value of the asset exceeds its

Under U.S.GAAP and IFRS reporting standards, management assesses the firm's assets for impairment at each reporting date by determining if impairment indicators are present.Impairment indicators do not include

The economic value of a tangible asset may decline below its book value but an impairment loss would not be recognized when the

U.S.GAAP provisions require a three-step procedure for measuring and recording impairments for long-lived assets other than nonamortized intangibles and goodwill.An asset impairment loss arises when the carrying values of the assets

An impairment loss on all intangibles that do not require amortization, except goodwill, arises when

An impairment loss on a brand name arises when