In: Accounting
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.
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.