Question

1/ At the beginning of 2016, Robotics Inc. acquired a manufacturing facility for $12.8 million. $9.8 million of the purchase price was allocated to the building. Depreciation for 2016 and 2017 was calculated using the straight-line method, a 25-year useful life, and a $1.8 million residual value. In 2018, the estimates of useful life and residual value were changed to 20 total years and $580,000, respectively.

What is depreciation on the building for 2018? (Round answer to the nearest whole dollar.)
  

2/ Collison and Ryder Company (C&R) has been experiencing declining market conditions for its sportswear division. Management decided to test the assets of the division for possible impairment. The test revealed the following: book value of division’s assets, $27.1 million; fair value of division’s assets, $21.3 million; sum of estimated future cash flows generated from the division’s assets, $28.3 million.

What amount of impairment loss should C&R recognize? (Enter your answer in whole dollars.)
  

Answer 1

1)

	Depreciation	=	$ 476,667
	Workings:
	Purchase price allocated to building	=	$ 9,800,000
Less:	Estimated Initial residual value	=	$ 1,800,000
(i)	Estimated Initial depreciable value	=	$ 8,000,000
(ii)	Estimated useful life	=	25 years
(i) / (ii)	Annual Depreciation (Straight Line)	=	$ 320,000
	Number of years elapsed	=	2 years
	Accumulated Depreciation (2016 and 2017) ($320000 X 2 years)	=	$ 640,000
	Purchase price allocated to building	=	$ 9,800,000
Less:	Accumulated Depreciation 2016 and 2017	=	$ 640,000
	Remaining Book Value	=	$ 9,160,000
Less:	Revised residual value	=	$ 580,000
(iii)	Revised Depreciable value	=	$ 8,580,000
(iv)	Remaining useful life (20 years - 2 years)	=	18 years
(iii) X (iv)	Revised Depreciation for 2018	=	$ 476,667

2)

Impairment; property plant and equipment:

Book Value = 27.3 million

Fair Value = 21.3 million

Estimated Future Cash Flow = 28.3 million.

Property, plant and Equipment and future life intangible assets are listed for impairment only when events or charges in circumstances indicate book value may not be recoverable.

An impairment loss is required only when the undiscounted sum of future cash flow is less than book value. Here Book Value is 27.1 million.

Undiscounted future cash flow is 28.3 million, hence undiscounted future cash flow (28.3 million)

is more than Book value (27.1 million), so here calculation of impairment loss is not required.