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In: Accounting

General Optic Corporation operates a manufacturing plant in Arizona. Due to a significant decline in demand...

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 $ 35,500,000
Accumulated depreciation 14,500,000
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
15,600,000


The fair value of the Arizona plant is estimated to be $12,500,000.

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 $13,500,000 instead of $15,600,000 and $21,250,000 instead of $15,600,000.

Solutions

Expert Solution

Requirement 1

Book Value = 35,500,000-14,500,000 = 21,000,000

An impairment loss is indicated because the estimated undsicounted sum of future cash flows of $15.6 million is less than the book value of 21.0 million

Requirement 2

The amount of loos to be reported:

Book value

$21,000,000

Estimated fair value

$12,500,000

Impairment Loss

$8,500.000

The loss would appear in the income statement as an other operating expense

Requirement 3

General journal

Debit

Credit

Impairement Loss

8,500,000

Accumulated Depreciation

14,500,000

Assets

23,000,000

Requirement 4

The amount of impairment loss:

Book value

$21,000,000

Estimated fair value

$12,500,000

Impairment Loss

$8,500.000

There is an impairment loss because the undsicounted sum of future cash flows 13.5 million is less then the book values of 21.0 million.

Requirement 5

There is not impairment loss because the undiscounted future cash flows $21,250,000 is greater then the book value of 21.0 million.


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