Final Exam Study Guide

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Final Exam Study Guide

In depth overview of lectures of Chapters 10 and 11-- Class Days 26, 28 and 29

Study Guide
University of Alabama
Ac 310 - Finan Report Analy Bus Activ I
Finan Report Analy Bus Activ I Documents

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AC 310 7th Edition Final Exam Study Guide Days 26 - 29 Days 26 - 29 Chapter 11 Impairment: when a significant decline of an asset’s benefits occurs  Recognizing a loss depends on if the asset will be used or sold in the future Intangibles that are amortized (Definite Life) *Same approach taken as long-lived assets *Two step approach: 1. Test for impairment: undiscounted sum of future cash flows must be lower than book value for an item to be impaired 2. Book Value – Fair Value = Impairment Loss Practice Problem2 (Day 29 Slides) Equipment purchased 8 years ago for 1,000,000 Straight line method, 10% residual, 20 year life Test for impairment: decide remaining life = 7 years Net cash inflow: $80,000 year; Fair Value = $240,000 1. Impairment? (1,000,000 – 100,000) = $45,000 annual depreciation 20 years Accumulated Depreciation: $45,000 * 8 = 360,000 Cost – Acc. Dep. = Book Value (1,000,000 – 360,000 = 640,000) 2. Cash flows: $80,000 * 7 years = 560,000 (BV: 640,000) > (FCF: 560,000) = impairment! 3. Book Value – Fair Value = Loss 640,000 – 240,000 = $400,000 Impairment Loss Journal Entry: Dr Loss on Impairment 400,000 Cr Acc. Dep. 400,000 Would there still be impairment if fair value was $500,000? Yes: Only the loss would change. It would go from $400,000 to $140,000. Intangibles that are NOT amortized (Indefinite Life) Should be tested for impairment annually. *One step process: 1. Compare book value to fair value (we expect cash flows to continue indefinitely) a. Divide yearly cash flows by discount rate to get fair value b. If book value > fair value, then impairment exists. Recovery of an impairment loss is prohibited. Goodwill Acquired only with the purchase of a company Goodwill is NOT amortized, so test yearly for impairment. Goodwill (in general) is Purchase price – fair value of net assets (always the residual amount) FV of net assets = assets – liabilities Impairment testing is a process: 1. Estimate fair value for entire reporting (operating) unit 2. Compare value of reporting unit with book value a. If book value is greater, impairment loss is indicated 3. Find Implied Fair Value of Goodwill a. Estimated fair value of reporting unit – net fair value of assets = Implied Goodwill **There may be other assets that are impaired, so the company would want to do impairment testing after gaining this knowledge. Assets Held for Sale For assets held for sale, if Book Value Exceeds Fair Value minus cost to sell, an impairment loss is recognized for the difference. Depreciation Methods: Straight-Line: (Cost – Residual) = Yearly depreciation Useful life *Gives an equal amount of depreciation for every year Sum of the Years’ Digits (Accelerated Method) *Multiplies the depreciable base by a fraction that declines each year

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