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Chapter 11: Q18Q (page 583)

Toro Co. has equipment with a carrying amount of \(700,000. The expected future net cash flows from the equipment are \)705,000, and its fair value is $590,000. The equipment is expected to be used in operations in the future. What amount (if any) should Toro report as an impairment to its equipment?

Short Answer

Expert verified

Answer

No impairment is assumed to have occurred; thus, no measurement of the loss is made or recognized.

Step by step solution

01

Meaning of Fair Value

According to a company's financial statement, the fair value represents the estimated value of its assets and liabilities. Fair market value refers to an item's sale value that is fair for the buyer and the seller. In other words, it is the 'potential price' of an asset or debt rather than its historical price or market value.

02

Determining the amount that should Toro report as an impairment. 

According to the recoverability test, impairment occurs when the carrying value of an asset exceeds the projected future net cash flows from the asset. The expected future net cash flows of $705,000 exceed the $700,000 carrying value of the equipment. As a consequence, despite the equipment's $590,000 fair value, no impairment is judged to have occurred, and there is no assessment or acknowledgment of the loss.

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Most popular questions from this chapter

(Ratio Analysis) The 2014 annual report of Tootsie Roll Industries contains the following information.

(in millions)

December 31, 2014

December 31, 2013

Total assets

\(910.4

\)888.4

Total liabilities

219.3

208.1

Net sales

539.9

539.6

Net income

63.2

60.8

Instructions

Compute the following ratios for Tootsie Roll for 2014.

  1. Asset turnover.
  2. Return on assets.
  3. Profit margin on sales.
  4. How can the asset turnover be used to compute the return on assets?

(Book vs. Tax (MACRS) Depreciation) Futabatei Enterprises purchased a delivery truck on January 1, 2017, at a cost of \(27,000. The truck has a useful life of 7 years with an estimated salvage value of \)6,000. The straight-line method is used for book purposes. For tax purposes, the truck, having an MACRS class life of 7 years, is classified as 5-year property; the optional MACRS tax rate tables are used to compute depreciation. In addition, assume that for 2017 and 2018 the company has revenues of \(200,000 and operating expenses (excluding depreciation) of \)130,000.

Instructions

  1. Prepare income statements for 2017 and 2018. (The final amount reported on the income statement should be income before income taxes.)
  2. Compute taxable income for 2017 and 2018.
  3. Determine the total depreciation to be taken over the useful life of the delivery truck for both book and tax purposes.
  4. Explain why depreciation for book and tax purposes will generally be different over the useful life of a depreciable asset.

(Depreciation Choice—Ethics) Jerry Prior, Beeler Corporation’s controller, is concerned that net income may be lower this year. He is afraid upper-level management might recommend cost reductions by laying off accounting staff, including him.

Prior knows that depreciation is a major expense for Beeler. The company currently uses the double-declining-balance method for both financial reporting and tax purposes, and he’s thinking of selling equipment that, given its age, is primarily used when there are periodic spikes in demand. The equipment has a carrying value of \(2,000,000 and a fair value of \)2,180,000. The gain on the sale would be reported in the income statement. He doesn’t want to highlight this method of increasing income. He thinks, “Why don’t I increase the estimated useful lives and the salvage values? That will decrease depreciation expense and require less extensive disclosure, since the changes are accounted for prospectively. I may be able to save my job and those of my staff.”

Instructions

Answer the following questions.

  1. Who are the stakeholders in this situation?
  2. What are the ethical issues involved?
  3. What should Prior do?

Tan Chin Company purchases a building for \(11,300,000 on January 2, 2017. An engineer’s report shows that of the total purchase price, \)11,000,000 should be allocated to the building (with a 40-year life), \(150,000 to 15-year property, and \)150,000 to 5-year property. No residual (salvage) value should be considered. Compute depreciation expense for 2017 using component depreciation.

Andrea Torbert purchased a computer for \(8,000 on July 1, 2017. She intends to depreciate it over 4 years using the double-declining-balance method. Salvage value is \)1,000. Compute depreciation for 2018.
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