CFA Level I, Finan­cial Repor­ting and Ana­ly­sis, Long-Lived Assets, Impairment

A machi­ne is bought for €15,000, it has a use­ful life of five years. At the end of the second year, its fair value amounts to €7,000, the cost to sell are € 2,000. Its cash flows for the peri­ods 3, 4, and 5 are €3,000 each. Cal­cu­la­te with an inte­rest rate of 10 percent. 

The impairment at the end of the second year is equal to

  1. €1,539.44
  2. €7,466.56
  3. €3,000.00

Solu­ti­on. A is correct. 

First, we com­pu­te the reco­ver­a­ble amount.

reco­ver­a­ble amount = max{ future value is sold minus cost to sell; value in use} 

= max{7,000 – 2,000 ; 3,000/1,1 + 3,000/1,1^2 + 3,000/1,1^3}

= max{5,000 ; 7,466.56}

= €7,466.56.  

The­re­fo­re, an impairment of €1,539.44 needs to be added to the depre­cia­ti­on of €3,000 in the second year so that we have a book value of €7,466.56 at the end of the second year.

 

The most important points of Finan­cial Repor­ting and Ana­ly­sis, and Long-Lived Assets in this post can be sum­ma­ri­sed in this Mind­Map:

Did you find the Mind­Map hel­pful? All Lam­bert Edu­ca­ti­on Mind­Maps for CFA Level 1 and Level 2 can be purcha­sed in the online shop at https://daniel-lambert.de/produkt-kategorie/chartered-financial-analyst/

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