Question 1

Which of the following must be tested for impairment each year?

Accepted Answer

All intangible assets must be tested for impairment each year.

Question 2

Celt Caledonia has several patents on textile machinery. Because of technological advances in Asia that allow Asians to produce textiles faster and more efficiently, Celt Caledonia believes its patents are impaired. Celt Caledonia has determined that the fair market value of the patents is about €6 million less €500,000 in legal fees. Celt Caledonia has determined that the patent will generate €4 million each year for the next 2 years. At that point, it will have zero salvage value. Celt Caledonia's risk premium is 4 percent. The risk-free rate 3 percent. What is the patents' value in use (round to the nearest tenth of a million?

Accepted Answer

To calculate the value in use of the patents, we need to discount the future cash flows back to their present value. The cash flows are €4 million per year for 2 years. The discount rate is the risk-free rate plus the risk premium, which is 3% + 4% = 7%.The present value (PV) formula for each year is: PV = Cash Flow / (1 + r)^n, where r is the discount rate and n is the year.For year 1: PV = €4 million / (1 + 0.07)^1 = €4 million / 1.07 ≈ €3.738 millionFor year 2: PV = €4 million / (1 + 0.07)^2 = €4 million / 1.1449 ≈ €3.493 millionAdding these together gives the patents' value in use: €3.738 million + €3.493 million ≈ €7.231 million, which rounds to €7.2 million.

Question 3

Which of the following is not a criterion for testing for impairment using the most recent calculation of the recoverable amount of a CGU to which goodwill has been allocated in the prior period?

Accepted Answer

The criterion for testing for impairment regarding the materiality of goodwill in relation to the carrying value is not a factor in deciding whether to use the most recent calculation of the recoverable amount. The other options (A, B, C, E) relate to changes in assets and liabilities, the relationship between recoverable amount and carrying value, and the likelihood of the recoverable amount being less than the carrying amount, which are relevant considerations.

Question 4

Which of the following would be considered a corporate asset?

Accepted Answer

The answer of Which of the following would be considered...

Question 5

Staffordshire is a manufacturer of Tung oil, spar varnish, resins, and fine urethanes for marine application. Accountants have determined that the recoverable amount of their urethane CGU is $14.00 million. The carrying amount of the goodwill allocated to the CGU is $1.00 million, and the carrying amount of the CGU's proprietary formula patents is $1.00 million. The urethane CGU also has mixing drums, storage tanks, and boilers with a carrying value of $10 million. Accounts receivable are carried at $2 million. Inventory is carried at $2 million. What is the impairment loss allocated to the formula patents (assuming that the only assets that the urethane CGU has are the ones listed)?

Accepted Answer

The answer of Staffordshire is a manufacturer of Tung oil,...

Question 6

Which of the following assets must be tested for impairment each year?

Accepted Answer

All of the listed assets—intangible assets with indefinite useful lives, intangible assets not yet available for use, and goodwill acquired in a business combination—must be tested for impairment annually according to accounting standards.

Question 7

If an asset is carried under the revaluation model, the im?pairment loss is recognized in other comprehensive income (OCI) to the extent that it

Accepted Answer

Under the revaluation model, if an asset previously revalued upwards experiences an impairment loss, the loss is first allocated to any existing revaluation surplus related to that asset. Only the excess of the impairment loss over the revaluation surplus (if any) is recognized in profit or loss. This approach ensures that the impairment loss reverses any previously recognized gains in the revaluation surplus for the same asset before impacting profit or loss.

Question 8

An asset is impaired if

Accepted Answer

An asset is considered impaired when its carrying amount (book value) exceeds its recoverable amount, which is the higher of an asset's fair value less costs to sell and its value in use. This definition aligns with accounting standards such as IFRS and GAAP.

Question 9

Walther-Neiderhausen, a publisher, has purchased a brand name from another publisher that focuses on publishing non-fiction books. The brand name suffered some negative publicity which may have damaged the brand name. An impairment test is required.

Accepted Answer

An impairment test is necessary when there are indicators that an asset, such as a brand name, may have lost value. Negative publicity affecting the brand name suggests its value might have been diminished, warranting an impairment test to assess its current worth.

Question 10

A patent is carried under the revaluation model. It has been determined that the patent is impaired. There is a revaluation surplus of $25,000 and the impairment loss is $35,000. The revaluation surplus in OCI will have a debit balance.

Accepted Answer

The revaluation surplus in OCI (Other Comprehensive Income) will decrease by the impairment loss amount until it reaches zero, and any remaining impairment loss would be recognized in profit or loss. Since the revaluation surplus is $25,000 and the impairment loss is $35,000, the surplus would be fully utilized, but it would not result in a debit balance; instead, the remaining $10,000 of the impairment loss would be recognized in the profit or loss statement.

Question 11

Buck & Sons Expeditionary is an outfitter for research expeditions. They have a patent on some proprietary crampons and ice picks that they have developed. These patents are part of their ice-climbing CGU. The patents are showing signs of impairment and the entire CGU must be tested.

Accepted Answer

When a specific asset within a Cash Generating Unit (CGU), like patents in this case, shows signs of impairment, it necessitates the testing of the entire CGU for impairment, according to accounting standards.

Question 12

Bear & Brothers Boating manufactures custom yachts and wooden vessels. They have a CGU with $5 million worth of goodwill allocated to it. Only the goodwill need be tested for impairment annually.

Accepted Answer

Goodwill should be tested for impairment annually, but not in isolation. The entire Cash Generating Unit (CGU) to which the goodwill has been allocated should be tested for impairment. This means evaluating if the carrying amount of the CGU, including goodwill, exceeds its recoverable amount.

Question 13

Hiawatha Bowline is a manufacturer of fixed-wing aircraft. They manufacture planes from small bush planes to larger corporate jets. Hiawatha Bowline has allocated goodwill to the small bush plane CGU. Two years ago, there were several defects in casting propeller blades which led to several crashes and bad publicity. At the end of the same year, the company determined that the goodwill was impaired (but not fully). This year, however, the defects have been worked out, and Hiawatha Bowline has, according to consumer ratings, the most reliable small bush plane on the market. Business is booming, and it is appropriate to reverse any impairment loss to goodwill per IAS 36.

Accepted Answer

According to IAS 36, impairment losses recognized for goodwill cannot be reversed in subsequent periods.

Question 14

If the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount and this reduction is the impairment loss.

Accepted Answer

This statement accurately describes the accounting treatment for an impairment loss. When the recoverable amount (the higher of an asset's fair value less costs to sell and its value in use) of an asset is less than its carrying amount, the carrying amount is reduced to the recoverable amount, and the difference is recognized as an impairment loss.

Question 15

Assets are grouped into cash-generating units for the purpose of impairment testing if they do not generate independent cash flows on their own.

Accepted Answer

Assets are grouped into cash-generating units (CGUs) for impairment testing when they do not generate cash inflows that are largely independent of those from other assets or groups of assets, making it necessary to evaluate them as a collective group to determine if an impairment loss should be recognized.

Question 16

Impairment losses (except on goodwill) are required to be reversed, if certain criteria are met.

Accepted Answer

Impairment losses on assets, other than goodwill, can be reversed if there is a subsequent increase in the recoverable amount of the asset, indicating that the impairment loss recognized in prior periods no longer exists or has decreased.

Question 17

Royal Sheffield Motorcycle has a motorcycle that it sells for military application which is branded Loyal Red. Royal Sheffield bought the brand during World War II. The British military has decided, however, to discontinue using the motorcycle, and Royal Sheffield believes that its Loyal Red brand of motorcycles may be impaired. Royal Sheffield estimates that during the first year, the Loyal Red brand should result in ₤50 million. The risk-free rate is 3.5 percent while the risk premium of the first year cash flows is 2.5 percent. However, there is considerably more variability in the second and final year of cash flows. For each ₤5 million in cash flows after the second year, there is an increase in the risk premium of 50 basis points. Estimated cash flows for year two are ₤25 million. Royal Sheffield's applicable tax rate is 35 percent. At the end of year two, Royal Sheffield estimates that it can sell Loyal Red for ₤10 million. What is the value in use of the Loyal Red Brand?

Accepted Answer

The answer of Royal Sheffield Motorcycle has a motorcycle that...

Question 18

Strawberry Fields Farms has four cash-generating units as follow:
a. Strawberry Farming: worth $4 million
b. Boysenberry Farming: worth $2.0 million
c. Raspberry Farming: worth $4.2 million
d. Blueberry Farming: worth $3.8 million
This year, Strawberry Fields Farms decided to move the company in a different direction. They decided to discontinue the boysenberry CGU due to low demand. They also decided to purchase John's Jams, which produces blueberry and raspberry preserves. $5 million in goodwill was accrued by Strawberry Fields Farms as a result. How should Strawberry Fields Farms allocate the goodwill amongst its CGUs?

Accepted Answer

The answer of Strawberry Fields Farms has four cash-generating units...

Question 19

Refer to question 2. Assume that John's Jams produces boysenberry jam in addition to its blueberry and raspberry jams. Also assume that SFF purchased John's Jams on January 1 and that the boysenberry CGU was discontinued on December 31 of the same year. How would the goodwill be allocated to the CGUs under these circumstances?

Accepted Answer

The answer of Refer to question 2. Assume that John's...

Question 20

Refer to questions 2 and 3. Assume the same facts as question 3. On December 31, when Strawberry Fields Farms discontinues the Boysenberry CGU, how much of a loss will SFF sustain assuming that a separate company paid the bargain price of $200,000 for the CGU?

Accepted Answer

The answer of Refer to questions 2 and 3. Assume...

Quiz 18: Impairment of Assets