Explain how gains or losses on impaired assets should be reported in income
What will be an ideal response?
Answer: Gains on impaired assets would never be reported. Losses would be reported if the asset is deemed to be impaired, which occurs if the carrying value of the asset is greater than the undiscounted cash flows from the use of that asset.
When recording the impairment loss, the firm eliminates the balance in the accumulated depreciation (or accumulated amortization) account and reduces the asset account. Specifically, it recognizes the impairment loss by:
1. Debiting the loss.
2. Debiting the accumulated depreciation or accumulated amortization for its entire balance.
3. Crediting the asset account for the sum of the loss and the accumulated depreciation or accumulated amortization.
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