Question

An impairment of property, plant, or equipment has occurred if:

1) the revised estimated useful life is less than the original estimated useful life
2) the expected future cash outflows exceeds the asset's carrying value
3) the estimated salvage value is less than the actual proceeds received on disposal
4) the sum of the expected future net cash flows is less than the asset's carrying value

Answer 1

An impairment of property, plant, or equipment occurs when 4) the sum of the expected future net cash flows is less than the asset's carrying value.

Step-by-step explanation:

An impairment of property, plant, or equipment occurs if the sum of the expected future net cash flows is less than the asset's carrying value. This means that the expected future cash inflows from the asset are not sufficient to recover the original cost of the asset. When this happens, the asset is considered impaired and its carrying value must be reduced to its recoverable amount.

For example, let's say a company owns a building that has a carrying value of $1 million. The expected future net cash flows from the building are estimated to be $800,000. Since $800,000 is less than $1 million, the building is impaired and its carrying value needs to be reduced to $800,000.