- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 23. Long-lived Assets
- Subject 5. Impairment of Assets
CFA Practice Question
Taylor Corporation has determined that a printing press that it purchased in 2008 for $400,000 has become partially obsolete due to newer equipment purchased in 2010. The press had a book value of $160,000 on December 31, 2010. At the end of the press's life, its estimated value is $40,000, and the net future cash flows from using the machine are estimated to be $90,000. These cash flows have a present value of $73,800 and $32,200, from future cash flows and residual value, respectively. What amount should Taylor record as "loss due to asset impairment" (under U.S. GAAP)?
A. $30,000
B. $32,000
C. $54,000
Explanation: When a fair market value is not available, the discounted future cash flows can be used as the cost basis. The present value of the future cash flows is $106,000 ($73,800 + $32,200). The loss is $54,000 ($160,000 book value less $106,000).
User Contributed Comments 5
| User | Comment |
|---|---|
| danlan | The loss is 160000-(73800+32200)=54000 |
| galgan | to kalps: i think if book value is 129000, impairment shoudl not be recognized as it woudl be lower than undiscounted future cash flows... |
| jackwez | $160K book value > PV of future cash flows (106)... impairment must be booked. |
| lavalyn | Hmm. So we can only impair the asset if the carrying value exceeds the undiscounted future cash flows, but we impair it down to the discounted value? |
| najat | yes, impairment loss= (Book value) - (Fair Value or Present Value of future Cash Flows) |