Reference no: EM1333680
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 these impaired assets must be written down (see the Case in Point below).
Asset dispositions occur frequently in many businesses, and the gains and losses that result often are material in amount. For instance, recent financial statements of U.S. Steel and Dow Chemical reported gains on asset dispositions of $40 million and $24 million, respectively.
The income statements of Consolidated Freightlines and Ford Motor Company, on the other hand, reported losses on asset dispositions of $4 million and $235 million, respectively.
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.
b. Explain why the recent $9.5 million charge to write down these impaired assets is considered a noncash expense.