Ch 12 Solutions.doc

# Ch 12 Solutions.doc - L.O.2 Solution to BE12-2 An...

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L.O.2 Solution to BE12-2 An impairment loss will not be recorded for this asset for the current year. First, determine that evidence and circumstances indicated that impairment is likely. Then, test for impairment. Step1: The projected future cash flows are equal to \$120,000 per year for three years or total undiscounted future cash flows of \$360,000. The carrying value of the asset is equal to \$300,000. Thus, since the carrying value is less than the undiscounted cash flows, the company does not need to perform Step 2. Solution to BE12-3 Tank Top’s assets are impaired. First, determine that evidence and circumstances indicated that impairment is likely. Then, test for impairment. Step1:The recoverability assessment indicated that the sum of the undiscounted future cash flows (i.e., \$1,300,000) is less than the net carrying value of the asset (i.e., \$1,600,000), indicating that the assets are impaired. So, move to Step 2. Step2:The fair value is used to measure impairment. In this case the impairment loss is \$600,000, computed as the difference between the fair value of the assets (i.e., \$1,000,000) and the net carrying value of the assets (i.e., \$1,600,000). The journal entry to record the impairment loss is presented below. Loss due to Impairment 600,000 Accumulated Depreciation-Plant and Equipment 600,000

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Solution to E12-1 a. The asset group for purposes of impairment testing would only include the lens manufacturing equipment and the lens polishing equipment. The factory building, land, general factory equipment, and delivery trucks have alternative future uses. Given the alternative future use of these items, additional cash flows can be generated toward the recovery of the carrying value of these assets. In addition, the cash flows related to these assets are independent of the company’s lens operations. Account Carrying Value Estimated Fair Value Lens manufacturing equipment \$2,100,000 Less: Accumulated depreciation (600,000 ) Net book value \$1,500,000 \$1,100,000 Lens polishing equipment \$3,000,000 Less: Accumulated depreciation (1,200,000 ) Net book value \$1,800,000 \$1,625,000 Total Group Carrying Value and Fair Value \$3,300,000 \$2,725,000
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