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	$	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.

Answer 1

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.