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G. Disposals and Impairment of Value

G. Disposals and Impairment of Value

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Module 11: Fixed Assets


(amount received)

Accumulated depreciation

(old asset)

Old asset

Gain or loss





a. Remember to record depreciation for disposed assets up to the point of disposal.


Jimco, a manufacturer of sports equipment, purchased a machine for $6,000 on 1/1/Y1. The machine had an

eight-year life, a $600 salvage value, and was depreciated using the straight-line method. Thus, depreciation was

charged at a rate of $56.25 per month [($6,000 cost $600 salvage) ữ (8 yrs ì 12 mos/yr)]. If Jimco sells the asset

on 9/1/Y6 for $3,000, the following entries must be made to record year 6 depreciation and to record the sale:

Depreciation expense


  Accumulated depreciation ($56.25 × 8 mos)




Accumulated depreciation ($56.25 × 68 mos)




  Gain on sale of equip. [$3,000 cash – ($6,000 – $3,825)CV]


2. In some cases, assets are intended to be disposed of in a future reporting period rather than held for use. If

management has adopted such a plan for disposal, a loss is recognized if the fair value minus selling costs

(NRV) is less than the recorded carrying value.


Assume that the asset in the above example has not been sold yet. However, management intends to dispose of it

in the next year at NRV of $1,500. The entry to record management’s intents would be as follows:

Loss on planned disposition*


Equipment to be disposed of


Accumulated depreciation




* 1,500 – (6,000 – 3,825)

a. Fixed assets intended for disposal are not subsequently depreciated. The equipment to be disposed of would

be classified as other assets on the balance sheet.


Losses on fixed assets to be disposed of can be recovered due to changes in the fair value or selling costs

associated with the asset. This write-up, however, cannot exceed the carrying amount prior to recognition of

impairment. If the NRV for this asset increases in the next period, the maximum recovery (gain) that could

be recognized is $675.


Assets that are intended to be held and used should be tested for impairment. Impairment occurs when the

carrying amount of a long-lived asset or asset group exceeds its fair value. However, an impairment loss is

recognized only if the carrying amount of the asset is not recoverable. The carrying value is considered not

recoverable if it exceeds the sum of the expected value of the undiscounted cash flows.

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a. The loss on impairment recognized is the difference between the asset’s fair value and its carrying value. In

determining the fair value, the principal or most advantageous market for the asset should be used consistent

with the asset’s highest and best use. The in-use valuation premise assumes the highest value of the asset

is achieved by using it in the business with other assets. An in-exchange premise assumes that the highest

value of the asset is the amount received to sell the asset stand-alone.

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Module 11: Fixed Assets



Assume that the asset in the previous example is not to be sold. A test for impairment indicates that the net

undiscounted cash flows from the machine are $2,000. Since the carrying value is equal to $2,175 ($6,000 –

$3,825), the asset is impaired as of 9/1/Y6. If the machine’s fair value at this date is $1,400, its carrying value is

reduced, as shown below.

Loss on impairment [($6,000 – $3,825) CV – $1,400 FV]


  Accumulated depreciation


It will continue to be depreciated at $50.00 per month for its remaining useful life ($1,400 ÷ 28 mos = $50.00).

At 12/31/Y8, when the asset is fully depreciated, Jimco retires it and writes the machine off with the following


Accumulated depreciation




NOTE: The entire cost has been depreciated because upon impairment of the asset it was determined that the

equipment did not have a salvage value.

b. When management has alternative courses of action to recover the carrying amount of the assets or a

particular course has multiple outcomes in terms of cash flow, ASC 360-10-35-30 (SFAS 144) indicates

that probability-weighted cash flow approach should be considered. Recoveries of previously recognized

impairment losses may not be recognized in subsequent periods.



Depletion is “depreciation” of natural resources. The depletion base is the total cost of the property providing

the natural resources. This includes all development costs such as exploring, drilling, excavating, and other

preparatory costs.

a. The depletion base is usually allocated by the ratio of extracted units over the total expected recoverable


Units extracted

Total expected recoverable units


Depletion base

b. The unit depletion rate is frequently revised due to the uncertainties surrounding the recovery of natural

resources. The revised unit rate in any year takes the following form:

Orig. cost + Addl. cost incurred – Resid. value – Depletion taken in prev. yrs.

Units withdrawn currently + Estimated units recoverable at year-end

NOTE: The adjustment is being made prospectively (i.e., the remaining undepleted cost is being expensed

over the remaining recoverable units).

c. Depletion on resources extracted during an accounting period is allocated between inventory and cost of

goods sold.


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Module 11: Fixed Assets




Loss account for fixed assets. When an insured loss occurs, an insurance loss account should be set up and

charged for all losses. These losses include decreases in asset value, earned insurance premiums, etc. The

account should be credited for any payments from the insurance company. The remainder is closed to revenue

and expense summary.


Coinsurance. This area is tested on the Business Environment and Concepts section of the exam.

J. Goodwill and Other Intangible Assets

1. Intangible assets are nonphysical assets. Intangible assets normally include only noncurrent intangibles

(e.g., accounts receivable are not considered intangibles). Examples of intangible assets include copyrights,

leaseholds, organizational costs, trademarks, franchises, patents, and goodwill. These intangibles may be

categorized according to the following characteristics:

a. Identifiability. Separately identifiable or lacking specific identification.

b. Manner of acquisition. Acquired singly, in groups, or in business combinations; or developed internally.

c. Expected period of benefit. Limited by law or contract, related to human or economic factors, or indefinite

or indeterminate duration.

d. Separability from enterprise. Rights transferable without title, salable, or inseparable from the entire



Acquisition of intangibles. Purchased intangibles should be recorded at cost, which represents the fair

value of the intangible at time of acquisition. Internally developed intangibles are written off as research and

development expense; an exception is the cost to register a patent.


Acquisition of goodwill and allocation to reporting units. Goodwill is recorded only when an entire business

is purchased. Purchase of goodwill as part of acquiring a business is discussed in the Modules 16 and 18.

a. In a business acquisition, the recognized goodwill should be assigned to one or more reporting units. In

essence, the goodwill assigned to a reporting unit is the difference between the fair value of the unit and the

value of its individual assets and liabilities. A reporting unit can be an operating segment or one level below.


Allocation of Goodwill to a Reporting Unit

Dunn Corporation acquired all of the assets of Yeager Corporation for $12,000,000 cash. The assets were seen as

relating to three different reporting units (operating segments)—Communications, Technology, and Consulting.

The fair value of the Communications reporting unit at the date of acquisition was $4,700,000. Goodwill associated with the unit would be assigned based on a comparison of its total fair value to the value of its assets and

liabilities as shown below.

Communications Reporting Unit (In 000s)

Fair value


Accounts receivable



Net Equipment




Customer contracts


Current liabilities


Fair value of net assets


The amount of goodwill assigned to the reporting unit would be $300,000 ($4,700,000 – $4,400,000), the excess

of the fair value of the reporting unit over the value of its net assets. Goodwill would be assigned to the other two

reporting units in a similar manner.

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Module 11: Fixed Assets



Amortization of intangibles. Intangible assets that have a definite useful life are amortized by crediting the

intangible account directly (ordinarily, contra accounts are not used).

Amortization expense

Intangible asset



a. The method of amortization of intangibles should mirror the pattern that the asset is consumed. If the

pattern cannot be reliably determined, the straight-line basis should be used.


Determination of Useful Life of an Intangible Asset

Yeager Communications owns several radio stations and has $5,000,000 recorded as the carrying value of broadcast rights. The rights have a legal life of 7 more years but may be extended upon appropriate application for an

indefinite period. Since the company has the right and intent to extend the rights indefinitely, the useful life of the

asset should be considered indefinite and the rights should not be amortized.


Impairment of intangible assets. An intangible asset that is amortized should be tested for impairment.

a. An intangible asset that is determined to have an indefinite useful life should not be amortized. However, it

should be reevaluated every reporting period to determine if facts and circumstances have changed creating

a limited life and requiring it to be amortized. Also, such intangible assets should be tested for impairment

annually or more frequently if facts and circumstances indicate that impairment may have occurred. In

assessing impairment, an entity may choose to qualitatively assess (a likelihood of more than 50%) whether

a quantitative impairment assessment is necessary. Events and circumstances to be qualitatively examined

include, but are not limited to: cost increases negatively effecting future cash flows; financial performance

declines; legal, regulatory, or contractual changes; entity specific events; industry and market deterioration;

and other macroeconomic conditions. If it is not more likely than not that the events and circumstances lead

to impairment, then a quantitative assessment is unnecessary. However, if the qualitative assessment reveals

that it is more likely than not that the indefinite-lived intangible asset is impaired, a quantitative assessment

(described below) is necessary.

(1) If the carrying value of the intangible asset exceeds its fair value, an impairment loss should be recorded

in the amount of the difference.


Impairment of an Intangible Asset with an Indefinite Life

Wilson Company acquired a trademark for a major consumer product several years ago for $50,000. At the time

it was expected that the asset had an indefinite life. During its annual impairment test of this asset, the company

determined that unexpected competition has entered the market that will significantly reduce the future sales

of the product. Based on an analysis of cash flows, the trademark is determined to have a fair market value of

$30,000 and is expected to continue to have an indefinite useful life. The $20,000 ($50,000 – $30,000) impairment loss should be recognized as shown below.

Impairment loss





Impairment of goodwill. The goodwill assigned to a reporting unit should be examined for impairment on an

annual basis and between annual tests in certain circumstances. The annual examination may be performed any

time during the company’s fiscal year as long as it is done at the same time every year. Different reporting units

may be examined at different times during the year. An entity has the option to first qualitatively determine

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