Free CFA Certification Practice Questions:


Tezlla Motors Inc believes that its manufacturing equipment is permanently impaired. The original purchase price of the manufacturing equipment was $1,500,000 and the accumulated depreciation is $900,000. New estimates for the future cash flows from the equipment is $100,000 per year for the next 4 years with a discount rate of 10%.

The financial statements of Tezlla Motors Inc prior to the impairment is shown below:



What is the total debt to total capital ratio after the impairment is recognized?

A) 28.8%

B) 31.5%

C) 32.2%

  • [Ans: B]


    • Impairment losses are recognized when the asset's carrying value is not recoverable and its carrying value exceeds it fair value. Recoverability, under US standards, relates to undiscounted future cash flows, and fair value relates to discounted cash flows. An asset is considered NOT recoverable when the asset's carrying amount exceeds the undiscounted expected future cash flows. If the asset is considered not recoverable, the impairment loss is measured as the difference between its fair value and its carrying amount.

    1) Determine whether asset is impaired:

    Carrying Amount = Purchase Price - Accumulated Depreciation

    = 1,500,000 - 900,000 = 600,000


    Recoverable Amount = Undiscounted expected future cash flows

    = 100,000 * 4 = $400,000


    Asset is impaired since the carrying amount ($600,000) is greater than its recoverable amount ($400,000)



    2) Calculate amount of impairment loss:

    Impairment Loss = Fair Value -Carrying Value


    Fair Value = Discounted expected future cash flows

    N = 4, PMT = 100,000, I/Y = 10%, FV =0, --> CPT PV = $316,986.54


    Impairment Loss = Fair Value -Carrying Value

    = 316,986.54 - 600,000 = $(-283,013)



    3) Calculate Total Capital after impairment loss:

    Total Capital = Accounts Payable + LT Debt + Common Stock + (Retained Earnings - Impairment Loss)

    = 150,000 + 800,000 + 1,200,000 + (1,150,000 - 283,013) = $3,016,987



    4) Calculate Total Debt


    Total Debt = Accounts Payable + LT Debt

    = 150,000 + 800,000 = 950,000



    5) Calculate Total Debt / Total Capital


    = 950,000 / 3,016,987 = 31.5%






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