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Asset Impairments quiz #1

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  • What is the two-step process for testing and recording asset impairment under GAAP?
    The two-step process is: 1) Compare the asset's net book value to its estimated future cash flows; if the net book value exceeds the future cash flows, the asset is impaired. 2) Record an impairment loss by writing down the asset to its fair value, with the loss equal to net book value minus fair value.
  • How is the impairment loss for an asset calculated, and what journal entry is made to record it?
    The impairment loss is calculated as the net book value minus the fair value of the asset. The journal entry is a debit to 'Loss on Impairment' and a credit to the asset account for the amount of the loss.
  • According to the rule of conservatism, what happens after an asset is written down for impairment if its value later increases?
    Once an asset is written down for impairment, it cannot be written back up, even if its value increases later. This follows the rule of conservatism in accounting.
  • What is the first step in the GAAP asset impairment test?
    The first step is to compare the asset's net book value to its estimated future cash flows to determine if the asset is impaired.
  • When is an asset considered impaired under GAAP?
    An asset is considered impaired if its net book value exceeds its estimated future cash flows.
  • How do you calculate the impairment loss for an asset?
    The impairment loss is calculated as the net book value minus the fair market value of the asset.
  • What journal entry is made to record an impairment loss?
    You debit 'Loss on Impairment' and credit the asset account for the amount of the loss.
  • According to the rule of conservatism, what happens if an impaired asset later increases in value?
    Once an asset is written down for impairment, it cannot be written back up, even if its value increases later.
  • What three numbers are typically provided in an asset impairment question?
    You are usually given the net book value, estimated future cash flows, and the fair (market) value.
  • Why is the impairment loss recorded as a 'loss' and not an 'expense'?
    It is recorded as a 'loss' because it is not related to the company's core business operations, unlike regular expenses.