- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 7. Analysis of Long-Term Assets
- Subject 2. Impairment of Assets
CFA Practice Question
Foxburg Company purchased a new piece of machinery for $600,000 in January 2008. Foxburg depreciated this asset over 6 years using straight-line depreciation with no expected salvage value. They conclude near the end of 2010 (the third year of use) that the machine's operational value has been impaired to the point that its expected future cash flows are reasonably estimated to be $150,000 over the remaining three years. At the end of 2010, the machine's fair market value is approximately $125,000. Under U.S. GAAP, what amount should the machinery be reported at on the 12/31/10 balance sheet?
B. $125,000
C. $175,000
A. $150,000
B. $125,000
C. $175,000
Correct Answer: B
Per SFAS No. 121, once impairment has been established (expected future cash flows of $150,000 < $300,000 carrying value), the actual amount of the loss is determined by comparing the FMV of the asset ($125,000) with the carrying value ($300,000 or $600,000 - 3[600,000/6]). Thus, the loss would be $175,000 and the machinery would be written down to its fair value of $125,000.
User Contributed Comments 9
| User | Comment |
|---|---|
| stranger | here impairment is established since future undiscounted cash flows are less than current carrying value and loss is calculated as a difference between fair market value and carrying cost hence the loss is $175,000/- and book value should be written down to fair value of $125,000/- |
| kalps | Ok, 1) The evidence for requirement of an impairment is the fact that the estimated future undiscounted Cash Flows are less than the current market value 2) If answer to 1 is yes, then write down to its Fair value/Market value |
| mtcfa | And if the fair market value were not available, then we would use the present value of the discounted cash flows to record the value as well as a pretax impairment loss. |
| yonghui | the carrying value is $300,000 , and the FV<CF, so the loss was $175,000, and the fair value was $125,000. |
| cong | First step, determine whether undiscounted furutre cashflows are less than book value (carrying value, net book valu). If yes, impair the asset down all the way to fair market value. |
| gulfa99 | no need for calculation. the question is asking for FV to be reported in the balance sheet. 125 given in the question. |
| johntan1979 | No gulfa99, you need to calculate the depreciated asset value to determine if carrying value > est. future cash flow to decide to impair or not. If not, then the answer (if given in the question) would be $300,000 to record on balance sheet. You can't blindly jump on the fair value as the answer. |
| dbedford | So using SLD (600k[cost] - 0[no salvage value])/6[life] = 100k/yr we are at the end of year 3 so carrying value is 3 x 100k = 300k Using GAAP, loss: step 1 Carrying Value $300k > Future Cash Flows $150k Step 2 Book Value - Fair Value Book Value goes to FMV: $125k |
| khalifa92 | test: 150K PV < 300K CV = impairment exist measurement: 300K CV - 125K FV = 175K loss FV goes to balance sheet |