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[answered] BUSI 2001 - Intermediate Accounting Impairment, Assets Held


BUSI 2001 ? Intermediate Accounting

Impairment, Assets Held for Sale & Discontinued Operations

Problem 1

The Liao Corporation has determined that there may be indicators of impairment for one of their assets ? an office building that is currently leased out and a cash generating unit (CGU) representing a business unit. Data for the building and CGU follow. The year end is December 31, 20x4.

Building

Carrying value (20 years remaining,

$500,000 residual value)

$2,800,000

Fair value

2,000,000

Costs to sell

Future cash flows generated by building (each year

6% of fair value

to the end of its useful life)

$170,000

CGU

Carrying

Fair Value less Costs to

Value

Sell

Land

$1,000,000

$1,800,000

Building

2,400,000

1,700,000

Equipment

900,000

500,000

Goodwill???????????????????????????????????????????????????? ?????? 1,000,000???????????????????????? -


$5,300,000??????? $4,000,000

The CGU?s cash flows are expected to be equal to $500,000 for the next five years with a residual value of $2,500,000 at the end of five years.

Assume a discount rate of 5%.

Required ?

  • Calculate the amount of impairment loss (if any) for the building and CGU under the assumption that Liao is:
  • a publicly accountable entity. Allocate the impairment loss (if any) to the assets of the CGU.



2

  • a private company subject to ASPE. Just calculate the impairment loss.

  • Assume that on December 31, 20x6, the recoverable amount of the building is estimated to be $2,600,000. Calculate the amount of impairment loss reversal on the building at December 31, 20x6. Assume the company is a publicly accountable entity.

Problem 2

The Joel Corporation operates 6 business segments. The board of directors of the corporation made the decision to formally dispose of one of these segments on October 1, 20x4. The segment was put up for sale on this date and negotiations with potential buyers are still ongoing as at December 31, 20x4.

The income statement of Joel for the year ended December 31, 20x4 is as follows. Note that the financial results include the results of the segment that is held for sale.

Revenues

$13,560,000

Cost of goods sold

(6,000,000)

Operating expenses

(2,500,000)

Depreciation

(1,200,000)

Income tax expense

??????? (1,351,000)

Net income

$2,509,000

The operating results of the segment held for sale are as follows:

Revenues

$ 2,450,000

Cost of goods sold

(1,100,000)

Operating expenses

(600,000)

Depreciation*

?????????? (400,000)

Operating income

$?? 350,000

* Depreciation was incurred evenly throughout the whole year.

Data on the assets of the segment are as follows:

Carrying value??????????????????????????????????????????????????????????????????? $3,500,000

Fair value???????????????????????????????????????????????????????????????????????????? 2,500,000

Costs to sell???????????????????????????????????????????????????????????? 10% of fair value

Required ?

Assuming that Joel is a publicly accountable entity, reconstruct the income statement of the company for the year ended December 31, 20x4. The firm?s tax rate is 35%.


NetSales 131.634 165.1113 191.329 211.199

 

Gross Pro?t 28.9119 35.349 41.1114 46.23? Net Income 4.4311 5.311 6.295 6.61'1

 

Total Assets 49.996 111.349 13.1311 33.52?

 

Shareholders' Equity 21:112...

 


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