there are times when a company intends to dispose of the impaired asset, instead of holding it for use. Please explain how the impairment will be treated in this situation? Answer the question after reading discussion the below please?

 

A Certified Public Accountant (CPA) evaluates whether an asset is impaired by comparing its book value to its expected future cash flows. If the asset's book value exceeds expected future cash flows, the asset is considered impaired. This can happen when a company invests more funds in the asset than the revenue it generates, resulting in a loss. The expected future cash flows of an asset may change due to various factors, such as changes in technology and legal regulations or fluctuations in the asset's current market price. To record the impairment of an asset, the correct journal entry is to debit the Loss on Impairment account and credit the Asset account. The loss on impairment is calculated by subtracting the market value of the impaired asset (or future cash flows) from its book value. Some accountants use an impairment contra-asset account instead of crediting the asset account to determine the historical cost of the impaired asset separately. In this case, the net carrying cost will be the book value of the asset, the total accumulated depreciation, and the impairment contra asset amount. According to GAAP guidelines, the impaired asset must be recorded at the lower adjusted amount in the financial statements to reflect its actual value. If an asset is partially impaired, its value is reduced for a specific period, but not completely. In such cases, the impaired asset is valued by adjusting the new carrying value (or book value) with the help of the cost basis approach by accumulated depreciation. In this case, the journal entry is to debit the Loss on Impairment account and credit the Accumulated Depreciation account. Impairment of an asset has a significant impact on a company's profitability. The reporting of an impairment loss reduces the company's net income as it is reported with other gains or losses in the income statement. Additionally, the net carrying value of the asset in the balance sheet is written down to its current fair value, which reduces the company's financial position compared to the year when impairment was not identified. As a result, the asset side of the balance sheet is stated at a reduced value.

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When a company intends to dispose of an impaired asset instead of holding it for use the treatment o... View the full answer