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	$	45,500,000
Accumulated depreciation		15,500,000
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		17,600,000

The fair value of the Arizona plant is estimated to be $17,500,000.

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 $17,500,000 instead of $17,600,000 and $30,250,000 instead of $17,600,000.

Answer 1

Solution

General Optic Corporation

1&2 determination of the amount of impairment loss:          

Book value of plant assets = cost – accumulated depreciation

= $45,500,000 - $15,500,000 = $30,000,000

Impairment loss exists as the estimated undiscounted sum of future cash flows of $17,600,000 is less than the book value of $30,000,000. The impairment loss amount is calculated using the fair value as follows,

Impairment loss = book value – estimated fair value

= $30,000,000 - $17,500,000 = $12,500,000

Part 2 – The loss would appear in the income statement along with other operating expenses.

Part 3:

Entry to record the loss –

Account Titles	Debit	Credit
Loss on Impairment	$12,500,000
Accumulated Depreciation - Plant Assets	$15,500,000
Plant Assets		$28,00,000

After recording the impairment loss, the plant assets are revalued at the carrying value

Part 4.Determine impairment loss assuming the estimated undiscounted sum of future cash flows is $17,500,000:

Impairment loss exists as the estimated undiscounted sum of future cash flows of $17,500,000 is less than the book value of $30,000,000. The impairment loss amount is calculated using the fair value as follows,

Impairment loss = book value – estimated fair value

= $30,000,000 - $17,500,000 = $12,500,000

Part 5:

In situation where the undiscounted sum of future cash flows is $30,250,000, no impairment loss exists as the undiscounted future cash flows of $30,250,000 is more than the book value $30,000,0000 of plant assets.