ASSIGNMENT
Objective: To enhance the student's knowledge of contemporary accounting topics and the FASB Codification and to practice communicating the results of the research in a "clear, complete and professional" manner.
Issue: You have recently joined Karmel Company as a staff accountant in the controller's office. Karmel provides warehousing services for companies in several Midwestern cities. The location in Des Moines, Iowa has not been performing well due to increased competition and the loss of several customers that have recently gone out of business. Your department manager suspects that the plant and equipment may be impaired and wonders whether those assets should be written down as of the end of the fiscal year, December 31, 2013 and, if so, how to proceed. Given the company's prior success, this issue has never arisen in the past, so you have been asked to conduct some research on it.
The assets were acquired at the beginning of 2008 at a cost of $2,000,000 and have been depreciated on a straight line basis at the rate of $200,000 per year through December 31, 2012. (There was no salvage value.) The fair value of the group on October 1, 2013 is $800,000 and selling costs associated with the disposal are estimated to be $60,000. The company estimates that the future net cash flows (undiscounted) to be $830,000.
Instructions
1) Prepare a memo to your manager explaining:
a) What is the definition of asset impairment?
b) How does a company determine if an asset is impaired?
c) What would be the recommended journal entry, if the asset is considered impaired as of October 1, 2013?
d) What disclosures would be required in the Notes to the financial statements?
Your answers for (a), (b) and (c) must be supported by a codification citation. Do not copy and pastethe relevant part of the codification. Your manager may go to the codification herself and read it. Use your own words and provide the proper citation.
2) After reading your memo, the company decides to sell the asset group in the Des Moines location by March 31, 2014. Explain what would change if the company chose to sell the asset group rather than continuing to use the warehouse after writing it down. What journal entries and disclosures would you recommend?