Question

You have been provided with accounting research tools. Use them to answer the following multiple choice questions. After you make your choice, tell me what theory you are basing your answer on, or what part of the codification applies to the question

6 Hudson Corp. operates several factories that manufacture medical equipment. The factories have a historical cost of $200 million. Near the end of the company’s fiscal year, a change in business climate related to a competitor’s innovative products indicated to Hudson’s management that the $170 million carrying amount of the assets of one of Hudson’s factories may not be recoverable. Management identified cash flows from this factory and estimated that the undiscounted future cash flows over the remaining useful life of the factory would be $150 million. The fair value of the factory’s assets is reliably estimated to be $135 million. The change in business climate requires investigation of possible impairment. Which of the following amounts is the impairment loss?

A) $15 million. B) $20 million. C) $35 million. D) $65 million.

7. Harold Co. received $10,000 in cash and a productive asset with a fair value of $90,000 from Saxon Co. In exchange, Harold transferred a similar productive asset to Saxon. The asset transferred to Saxon had a fair value of $100,000 and a carrying amount of $80,000. If the transaction lacks commercial substance, at what amount should Harold record its newly acquired productive asset?

A) $90,000 B) $80,000 C) $72,000 D) $70,000

8. Which of the following statements describes the proper accounting for losses when nonmonetary assets are exchanged for other nonmonetary assets?

A) A loss is recognized immediately because assets received should not be valued at more than their cash equivalent price.

B) A loss is deferred so that the asset received in the exchange is properly valued.

C) A loss, if any, which is unrelated to the determination of the amount of the asset received should be recorded.

D) A loss can occur only when assets are sold or disposed of in a monetary transaction.

9. When an exchange of inventory items between an enterprise and another entity is undertaken to serve the needs of the enterprise’s customers, the enterprise should record the inventory items received based on the

A) Carrying amount of the inventory items relinquished.

B) Fair value of the inventory items relinquished.

C) Carrying amount of the inventory items received.

D) Fair value of the inventory items received.

Answer 1

6. Option B

An impairment loss is a recognized reduction in the carrying amount of an asset that is triggered by a decline in its fair value. When the fair value of an asset declines below its carrying amount, the difference is written off. Carrying amount is the acquisition cost of an asset, less any subsequent depreciation and impairment charges.

Reasoning: Impairment loss = Carrying Amount- Recoverable Value

= $170-$150

=$20

Recoverable Value means = Higher of Undiscounted Cash flows from future use or Fair Value

=$150 or $135

=$150.

7.Option c

When Asset has no commercial substance exists, the asset swap has effectively no accounting implications because there is no (or insignificant change) However, where an asset transfer results in a loss, the loss is recognized. If transfer of cash is involved, a gain may be recognized by the party which receives cash only to the extent of cash transfer as illustrated below.

From the above question, the fair value of the Company Harold is higher than its book value by $0,000 (i.e. fair value of $100,000 minus book value of asset of $80,000 , Company Harold can recognize only such gain on exchange which is realized in cash i.e. $2000 (=$10,000/$100,000 × $20,000).

Journal entry will be  

Debit: Cash A\c $10000

Debit   Asset received from saxon $72000

Credit : Asset given to Saxon $80000

Credit : Gain on exchange $2000

8.A

9.C