Rough Waters Ahead Essay

2108 Words Mar 11th, 2014 9 Pages
TrueBlood Case – Rough Waters Ahead 1. How should Smooth Sailings’ management perform the recoverability test for the cruise ship as of December 31, 2010? In addressing this question, consider:
The following are the required steps to identify, recognize and measure the impairment of a long-lived asset (group) to be held and used:

Step 1: Indicators of impairment — FASB ASC 360-10-35-21
“A long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.”

* In this case, there is a possibility of impairment because of an increased presence of pirates in the area in which Smooth Sailing cruises, the cruise ship’s operating
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This basis adjustment provides the same result as if the debt principal payments have been excluded (e.g., debt with a carrying value of $100 would have undiscounted cash flows of $100).
Option C which suggests foreclosure, will significantly reduces the total undiscounted cash flows that the company would have expected to recover. With a probability of 70% in future cash flows, it will cause the total estimated future cash inflows to be really low.
The nonrecourse debt being $4 mm, which is greater than the ship’s fair value of $3 mm, will be extinguished because the lender can only seize the collateral – which is the cruise ship.
2. What impairment loss, if any, should be recorded as of December 31, 2010?
FASB ASC ASC 360-10-35-17
An impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). That assessment shall be based on the carrying amount of the asset (asset group) at the date it is tested for recoverability, whether in use (see paragraph

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