Q12. Company BB acquires the assets of company CC for $15M, valuing its asset at
ID: 2596799 • Letter: Q
Question
Q12. Company BB acquires the assets of company CC for $15M, valuing its asset at $10M and recognizing goodwill of $5M on its balance sheet, After a year, company BB tests its assets for impairment and found out that company CC's revenue has been declining significantly. As a result, the current value of company CC's assets has decreased from $10M to $7M, having an impairment to the assets of $3M. This makes goodwill drop down from $5M to $2M. Which of the following is NOT true about company BB's financial statements: A. Goodwill on balance sheet reduces from $5M to $2M. B. An impairment charge of $3M is recorded on income statement, reducing net earnings by $3M. C. The impairment charge needs to be added back into cash expense from operations on cash flow statement. D. The only change to cash flow would be if there was a tax impact, but that would generally not be the case as impairments are generally not tax deductible.Explanation / Answer
The answer id D.
Alternatives A,B and C are the effects of the impairment .Whether there is a tax impact of an event or not , as impairment is a non cash expense it needs to be added back to the net income in the cash flow statement.
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