Question

Desert Reports the following for a piece of machinery. Demand for the product the machinery produces has declined so Desert deems it appropriate to test the asset for impairment. Balances are current as of the date of the impairment check.

Cost $ 490,000
Accumulated Depreciation $ 80,000
Fair Value $ 400,000
Undiscounted Sum of Net Future Cash Flows $ 420,000
Is the asset impaired?

Answer 1

The machinery is not considered impaired because the undiscounted sum of net future cash flows ($420,000) is greater than the carrying amount ($410,000).

Step-by-step explanation:

The question concerns whether a piece of machinery is impaired according to the provided financial data. An asset is considered impaired if its carrying amount exceeds the sum of the undiscounted future cash flows it is expected to generate. The carrying amount is calculated as the original cost minus accumulated depreciation.

In this case, the carrying amount is $490,000 (Cost) - $80,000 (Accumulated Depreciation) = $410,000. The undiscounted sum of net future cash flows is given as $420,000. Since the undiscounted cash flows exceed the carrying amount, the asset is not considered impaired. The fair value of the asset ($400,000) is not considered in this specific step of the impairment test; it would be used only if impairment was indicated after comparing the carrying amount to the undiscounted cash flows.