Question

Item 4

Item 4

El Dorado Foods Inc. owns a chain of specialty stores in the Pacific Northwest. Recently, four of the stores have experienced declining profits due to market saturation in the area. As a result, management gathered data about possible impairment of the assets of the stores. The information gathered was as follows:


Book value: $17.5 million
Fair value: $14.9 million
Undiscounted sum of future cash flows: $16.5 million


Required:
Assume that the undiscounted sum of future cash flows is $18.2 million, instead of $16.5 million. Determine the amount, if any, of the impairment loss that El Dorado must recognize on these assets. (Enter your answer in millions (i.e., 5,000,000 should be entered as 5).)
  

Answer 1

Answers

Impairment should be recognised when the book value of the asset exceeds its Recoverable amount

Impairment loss = Carrying amount - Recoverable amount

Recoverable amount is higher of

1. fair value less cost to sell
2. value in use

Value in use means discounted future cash flow.

Here we solving problem as per US GAAP.

Under US GAAP there are two steps

Step .1 Recoverablility test: Compare book value with undiscounted future cash flow. if book value exceeds, there is a impairment loss.

Impairment loss = Book value - fair value or Value in use

In our case value in use not available,

Case 1: Undiscounted sum of future cash flow is $16.5 million

Impairment loss = $17.5 million - $14.9 million

= $2.6 million.

Case 2.: Undiscounted sum of future cash flows is $18.2 million

There is no impairment because of book value $17.5 million less than the undiscounted sum of future cash flows $18.2 million.