Exercise 9.9
The write down of Impaired Assets LO4
LO7
For several years, a number of Food Lion, Inc., grocery stores were unprofitable. The company closed, and continues to close, some of these locations. It is apparent that the company will not be able to recover the cost of the assets associated with the closed stores. Thus, the current value of the impaired assets must be written down (see the Case in Point on page 381).
A recent Food Lion income statement reports a $9.5 million charge against income pertaining to the write-down of impaired assets.
a. Explain why Food Lion must write down the current carrying value of its unprofitable stores.
Food Lion must write down the current carrying value of its unprofitable stores because the stores are an asset that has depreciable value. The Food Lion stores are impaired plant assets in which Food Lion cannot reasonably expect to recover the costs associated with the stores. According to Williams, Haka, and Bettner if the cost of an asset cannot be recovered through future use or sale the asset should be written down to its net realizable value to a loss account. The depreciable assets must be removed from the asset account and the accumulated depreciation is removed from the related contra-asset account, as Food Lion can no longer generate any income from these stores.
b. Explain why the recent $9.5 million charge to write down these impaired assets is considered a noncash expense.
The $9.5 million charge to write down these impaired assets is considered a noncash expense but appears in the statement of cash flows as investing activities. This is because the gains or losses associated with the impaired assets is not taxable income and do not determine taxable income. This is because cash receipts are equal to the total proceeds received from the sale, not just the amount of any gain and because depreciable