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.........................................................................................................................$32,500,000 

Accumulated depreciation................................................................................14,200,000 

General’s estimate of the total cash flows to be generated by.........15,000,000 

selling the products manufactured at its Arizona plant, not discounted to present value

The fair value of the Arizona plant is estimated to be $11,000,000.

 

 

Required: 

1. Determine the amount of impairment loss, if any. 

2. If a loss is indicated, prepare the entry to record the loss. 

3. Repeat requirement 1 assuming that the estimated undiscounted sum of future cash flows is $12,000,000 instead of $15,000,000.

Answer 1

Impairment Loss

Impairment refers to the decrease in the value of long-lived assets due to obsolescence, damage. If the remaining book value of a long-lived asset could not be recovered from the future cash flows expected to be generated from the use of the asset, the value of the long-lived asset is said to be impaired. When the long-lived asset is impaired, then the future cash flows expected to be generated from the use of the asset is less than the current book value of the asset.

 

Impairment Loss: It refers to the difference between the current book value of the long-lived asset and the fair market value of the asset as on the impairment.

Treatment of Impairment Loss: When impairment occurs, the impairment loss is recorded in the income statement and the book value of the long-lived asset is decreased in the balance sheet.

 

Requirement 1

Determine the amount of impairment loss.

As per International Financial Reporting Standards, the impairment loss recognized when an asset’s book value exceeds the undiscounted sum of future cash flows. Therefore, impairment loss is determined as follows:

 

Impairment loss = Book value – Estimated

= $18,300,000 - $11,000,000

= $7,300,000

 

Hence, the amount of impairment loss is $7,300,000.

 

Requirement 2

Report loss in the multiple step income statement.

The loss will be reported in the income statement along with the operating expenses.

 

Requirement 3

Determine the amount of impairment loss when undiscounted sum of future cash flows ($12 million).

As per International Financial Reporting Standards, the impairment loss recognized when an asset’s book value ($18,300,000) exceeds the undiscounted sum of future cash flows ($12 million). Therefore, impairment loss is determined as follows:

 

Impairment loss = Book value – Estimated fair value

= $18,300,000 - $11,000,000

= $ 7,300,000

 

Hence, the amount of impairment loss is $7,300,000.

Requirement 1

 

Hence, the amount of impairment loss is $7,300,000.