For several years, a number of Food Lion, Inc., grocery stores were unprofitable. The company closed some of these locations. It was apparent that the company would not be able to recover the cost of the assets associated with the closed stores.
Thus, the current value of these impaired assets had to be written down. A note in the financial statements indicated that the company tests assets for impairment when circumstances indicate that an impairment may exist. For impairment testing, each store is considered a cash-generating unit. Stores with potential impairments are tested by comparing their carrying value with their recoverable amounts.
a. Explain why Food Lion wrote down the current carrying value of its unprofitable stores.