CFA Practice Question

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CFA Practice Question

Assume U.S. GAAP. 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 decreases.
B. impaired and future ROA increases.
C. not impaired and future ROA increases.
Explanation: 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.

User Contributed Comments 3

User Comment
tomalot Presume no scrap value?
alles What about the impairment loss that is recognized in the income statement? That would lead to a decrease in NI that is proportionally higher than the decrease in assets, which would make ROA decrease.
bretonpa I had the same view as alles
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