Question

Problem 1

The restoration approach is usually most appropriate for impairments caused by physical damage.
The Middleville School district has discovered mold in one of its schools. The school was constructed
10 years ago at a cost of $30 million. It had an expected useful life of 50 years and hence was 20 percent
depreciated. The cost to replace the school today would be $40 million. The district estimates that the cost
of eliminating the mold and making the associated repairs would be $4,000,000. The entire amount would
be covered by insurance.
1. How much of an impairment loss, without taking into account the insurance recovery, should the district
recognize?
2. What would be the new carrying value of the school after adjusting for the impairment?
3. How much of a net gain should the district recognize taking into account the insurance recovery?

Problem 2

The service units approach is most appropriate for impairments caused by technological obsolescence.
Clarkstown State University acquired specialized laboratory equipment with the expectation that it
would be used to perform approximately 3,000 tests per year over a 10-year period. The cost was $600,000.
After the equipment had been used for only three years and was 30 percent depreciated, the university realized
that the machine would likely be used to perform only 500 tests per year over the following seven years
owing to the introduction of more efficient equipment.
1. How much of an impairment loss should the university recognize?
2. What should be the new carrying value of the equipment?

Answer 1