Question

General Optic Corporation operates a manufacturing plant in Arizona. Due to a significant decline in demand for the product manufactured at the Arizona site, an impairment test is deemed appropriate. Management has acquired the following information for the assets at the plant:

Cost	$	38,500,000
Accumulated depreciation		14,800,000
General’s estimate of the total cash flows to be generated by selling the products manufactured at its Arizona plant, not discounted to present value		16,200,000

The fair value of the Arizona plant is estimated to be $14,000,000.

Required:
1. & 2. Determine the amount of impairment loss. If a loss is indicated, where would it appear in General Optic’s multiple-step income statement?
3. If a loss is indicated, prepare the entry to record the loss.
4. & 5. Determine the amount of impairment loss assuming that the estimated undiscounted sum of future cash flows is $15,000,000 instead of $16,200,000 and $24,350,000 instead of $16,200,000.

Answer 1

1.

Carrying value of the asset = Cost - Accumulated depreciation

= $38,500,000 - $14,800,000

= $23,700,000

The asset is impaired if the Carrying value of the asset is greater than non discounted future cash flows

As the Carrying value of the asset ($23,700,000) is greater than non discounted future cash flows ($16,200,000), the asset is impaired.

Impairment loss = Carrying value - Fair value

= $23,700,000 - $14,000,000

= $9,700,000

2.

Impairment loss appears on the Operating expenses section of the multi-step Income statement.

3.

Carrying value of the asset = Cost - Accumulated depreciation

= $38,500,000 - $14,800,000

= $23,700,000

The asset is impaired if the Carrying value of the asset is greater than non discounted future cash flows

As the Carrying value of the asset ($23,700,000) is greater than non discounted future cash flows ($15,000,000), the asset is impaired.

Impairment loss = Carrying value - Fair value

= $23,700,000 - $14,00,000

= $9,700,000

4.

Carrying value of the asset = Cost - Accumulated depreciation

= $38,500,000 - $14,800,000

= $23,700,000

The asset is impaired if the Carrying value of the asset is greater than non discounted future cash flows

As the Carrying value of the asset ($23,700,000) is not greater than non discounted future cash flows ($24,350,000), the asset is not impaired.

Impairment loss = $0