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Question: Assume that an asset is being examined and it is determined that its cash flows would be $10,000 per year for four years (assume that all cash flows are received at the end of the year). The carrying value of the asset is $35,000 and its replacement cost is $30,000. The firms cost of capital is 10 percent.

Required: a. What would be the amount, if any, that should be written off r because the asset is impaired under SF.AS No. 12I?

b. Why is your answer in part (a) anomalous and how does SF-AS . No. 121 justify it?

c. Would your answer to pan (a) be different if the cash flows were 58,000 rather _than $10,000? Explain.

d. Is there anything unusual about your answer to part (c) since accounting rules arc frequently concerned with conservatism?

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Accounting Basics, Accounting

Category:- Accounting Basics
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