Which of the following best describes an asset impairment?

• A. An asset is sold for more than its book value.
• B. An asset is revalued upward due to market appreciation.
• C. An asset is fully depreciated but still in use by the company.
• D. An asset is no longer useful and its carrying amount exceeds its recoverable amount.

Answer: (D)

Verified step by step guidance

1. Understand the concept of asset impairment: Asset impairment occurs when the carrying amount of an asset exceeds its recoverable amount, meaning the asset is no longer expected to generate sufficient future economic benefits to justify its current book value.
2. Identify the recoverable amount: The recoverable amount is the higher of the asset's fair value less costs to sell and its value in use (the present value of future cash flows expected to be derived from the asset).
3. Compare the carrying amount to the recoverable amount: If the carrying amount (the value of the asset recorded in the books) is greater than the recoverable amount, the asset is considered impaired.
4. Recognize the accounting treatment: When an asset is impaired, the impairment loss is calculated as the difference between the carrying amount and the recoverable amount. This loss is recorded in the income statement as an expense.
5. Understand the implications: Asset impairment affects the financial statements by reducing the value of the asset on the balance sheet and decreasing net income on the income statement. It reflects a decline in the economic utility of the asset.