Quiz #1 Solutions
Questions and solutions appear below. Correct answer is shown in bold and is underlined. For calculation questions, the supporting calculation is shown in bold font following the question.
1. Assets acquired under multi-year deferred payment contracts are:
a. Valued at their fair value on the date of the final payment.
b. Valued at the present value of the payments required by the contract.
c. Valued at the sum of the payments required by the contract.
d. None of the above.
2. A change in the estimated useful life and residual value of machinery in the current year is handled as:
a. A retrospective change back to the date of acquisition as though the current estimated life and residual value had been used all along.
b. A prospective change from the current year through the remainder of its useful life, using the new estimates.
c. A cumulative adjustment to income in the current year for the difference in depreciation under the new vs. old estimates.
d. None of the above is correct.
3. At the end of its 2011 fiscal year, a triggering event caused Janero Corporation to perform an impairment test for one of its manufacturing facilities. The following information is available:
Estimated undiscounted future cash flows
The manufacturing facility is:
a. Impaired because its book value exceeds undiscounted future cash flows
b. Not impaired because its book value exceeds undiscounted future cash flows.
c. Not impaired because it continues to produce revenue.
d. Impaired because its book value exceeds fair value.
Note that this is not a question about the size of the impairment loss. In other words, it is not a question about the fair value test. It is a question about whether impairment exists. That is answered by the recoverability test which compares the book value of $65 million to the undiscounted future cash flows of $60. If the