Financial Analysis Using Common-size I ...
Derecognition of an asset occurs whenever it is disposed of or it is not expected to generate any future benefits either from its use or disposal. As a result, the asset is removed from the financial statements.
Disposal of a long-lived operating asset is affected by selling it, exchanging it, or abandoning it.
The gain or loss resulting from the sale of a long-lived asset (for example, property, plant, and equipment) is computed as the sales proceed less the carrying amount of the asset as at the time of sale. The gain or loss is disclosed on the income statement, either as a component of other gains or losses. Alternatively, the gain or loss can be manifested in a separate line item when the amount is considered to be material.
Long-lived assets that are to be disposed through other means (for example, abandonment, exchange for another asset, or distribution to owners in a spin-off) other than sale are classified as assets held for use until disposal. The long-lived assets will, therefore, continue to be depreciated and tested for impairment, unless their carrying amount is zero, as is required of other long-lived assets owned by a company.
When an asset is retired or abandoned, its value is reduced by its carrying amount as at the time of its retirement or abandonment. A loss equal to the asset’s carrying amount is then recorded.
When an asset is exchanged, the carrying amount of the asset given up is removed from the balance sheet. The fair value of the acquired asset is added, and any difference between the carrying amount and the fair value is reported either as a gain or loss.
In a spin-off, an entire cash-generating unit of a company with all of its assets is spun off.
Which of the following statements is the least accurate?
- Asset value is increased by the carrying amount of an asset at the time of its retirement or abandonment.
- An asset that is derecognized is not expected to provide any future benefits either from its use or disposal.
- The gain or loss on the sale of a long-lived asset is equal to the sales proceed less the carrying amount of the asset at the time of sale.
The correct answer is A.
The asset value is reduced, not increased, by the carrying amount of an asset as at the time of its retirement or abandonment.
Options B and C provide accurate statements.
The profit or loss made out of the derecognition of a long-lived asset is reported on the income statement under:
- A separate line item.
- Other comprehensive income.
- Either a separate line item or other comprehensive income.
The correct answer is C.
The profit or loss made out of the sale of a disposed asset is recognized in the income statement either as a separate line item or under other comprehensive income.
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