Answer to the following questions: For several years, a number of Food Lion, Inc

Question

Answer to the following questions:

For several years, a number of Food Lion, Inc., grocery stores were unprofitable. The company closed, and continues to close, some of these locations. It is apparent that the company will not be able to recover the cost of the assets associated with the closed stores. Thus, the current value of these impaired assets must be written down (see the Case in Point on page 381). A recent Food Lion income statement reports a $9.5 million charge against income pertaining to the write-down of impaired assets.

a. Explain why Food Lion must write down the current carrying value of its unprofitable stores.
b. Explain why the recent $9.5 million charge to write down these impaired assets is considered a noncash expense.

Explanation / Answer

A. Because there would be no such recovery of the assets on their disposal.

b. Because the entry is :

Profit & Loss Account Dr 9.5m, Fixed Assets Cr 9.5

Hence as it does not affect cash account, it is a non-cash expense.

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