Question

The Blueberry Phone Company operates a factory to build its Crackberry phone. Technological advances by Blueberry’s competitors demolished Crackberry sales. Consequently, management is evaluating the Crackberry factory for impairment as of December 31, 2014. Below are facts about the factory. Original cost $150 million Accumulated depreciation 65 million Future cash flows: 2015 45 million 2016 20 million 2017 10 million Is factory impaired? ____________ Why? ________________________________________________

What is the present value of future cash flows rounded to $100,000 (Assume the cash is received at the end of each year and use an interest rate of 10%.):

             2015                 ________________________________

             2016                 ________________________________

            

2017                 ________________________________

            Total               ________________________________

What is the impairment loss?

Answer 1

I.) Impairment Test:-

The term "Impairment" refers to the permanent reduction in the value of a fixed asset. Generally, an asset is considered to be impaired if its Fair value or cash flows are lesser than the asset's carrying value. This might occur due to a variety of reasons like technological advancement, socio economical factors, etc.

With respect to the Blueberry Phone company, the follow are few facts :-

Cost Price of factory - $150,000,000

Depreciation - $65 million

Carrying value = Cost Price of asset - Depreciation

$150,000,000 - $65,000,000 = $85,000,000

Carrying Value of asset(factory)

Future Cash Flows :-

Year	Amount
2015	45,000,000
2016	20,000,000
2017	10,000,000
Total	75,000,000

As can be seen, while the estimated future cash flows is only $75,000,000 the carrying value of the asset is $85,00,000. Hence we realized that there is an Impairment loss of $10,000,000

The impairment of $10,000,000 is due to the fact that the Factory's estimated future cash flows is lesser than the Factory's carrying value. In order to present the true value of the asset in its financial statements, the Impairment is recorded.

2.) Present Value of Cash flows:-

The Present value of Cash flows can be calculated by discounting the interest rate (10%) for 3 years based on the Present Value Interest Factor(PVIF) table.

Year	Amount	PVIF Factor	Discounted Cash flows	Rounded to nearest $100,000
2015	45,000,000	0.9091	40,909,500	41,000,000
2016	20,000,000	0.8264	16,528,000	16,500,000
2017	10,000,000	0.7513	7,513,000	7,600,000
Total	75,000,000		64,950,500	65,100,000