21. The Stevens Co. has suffered losses in its film developing division for the
ID: 2489415 • Letter: 2
Question
21. The Stevens Co. has suffered losses in its film developing division for the last two years. On 12/31/10, the controller decided that he would need to apply the impairment test to film developing equipment and make any required adjustments. He gathered the following information and determined that the asset was impaired:
Balance in the Equipment account = $400,000
Balance in Accumulated Depreciation = $300,000
Future value of cash flows associated with the asset = $75,000
Fair value of asset on 12/31/10 = $60,000.
What is the amount of loss due to impairment?
A. Book value ($100,000) - Fair Value ($60,000) = $40,000
B. Book value ($100,000) - Future Cash Flows ($75,000) = $25,000
C. Future Cash flows ($75,000) - Fair Value (60,000) = $15,000
D. Cost of equipment ($400,000) - Future Cash Flows ($75,000) = $325,000
22. The Stevens Co. has suffered losses in its film developing division for the last two years. On 12/31/10, the controller decided that he would need to apply the impairment test to film developing equipment and make any required adjustments. He gathered the following information and determined that the asset was impaired:
Balance in the Equipment account = $400,000
Balance in Accumulated Depreciation = $300,000
Future value of cash flows associated with the asset = $75,000
Fair value of asset on 12/31/10 = $60,000.
Which of the following journal entries correctly records the impairment?
A. debit Loss Due to Impairment and credit Accumulated Depreciation
B. debit Accumulated Depreciation and credit Loss Due to Impairment
C. debit Equipment and credit Loss Due to Impairment
D. none of the above
23. The Abright Company wants to estimate the cost of ending inventory using the gross profit method. The estimated gross profit rate is 40%. The cost of net purchases during the year was $80,000. The beginning inventory was $4,000. Sales for the period were $100,000. The estimated cost of ending inventory is
A. 20000
B. 24000
C. 44000
D. 60000
Explanation / Answer
Answer for question no.21:
Impairment loss =Carrying amount - Recoverable amount.
Carrying amount = Book value - Accumulated depreciation.
=$400,000 -$300,000
=$100,000.
Recoverable amount = Greater of fair value excluding cost to sell or Present value of future net cash flows expected from the equipment
It is assumed that future values of the net cash flows is the present value of future cash flows, hence $75,000 is considered as recovrable amount as it is higher than the fair value of the asset.
Hence, the answer is Option B.
B. Book value ($100,000) - Future Cash Flows ($75,000) = $25,000
Answer for question no.22:
Answer is none of the above i.e., Option D.
The correct entry for recording impairmetn loss is as follows:
Loss due to impairment a/c Dr $25,000
Acccumulated depreciation a/c Dr $300,000
Asset a/c Cr $325,000
Answer for question no.23:
Estimated gross profit =40%.
Cost of goods sold= sales - Gross profit
Cost of goods sold=$100,000 - $100000*40%
=$60,000.
Cost of goods sold= Opening stock+Purchases - Closing stock
Closing stock = Opening stock + Purchases - Cost of goods sold
=$4,000+$80,000 -$60,000
=$24,000.
Therefore, answer is option B.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.