Third Eye Blind purchases machine for manufacturing clothing for $100,000 with an original estimated useful life...

Third Eye Blind purchases machine for manufacturing clothing for $100,000 with an original estimated useful life of 5 years and residual value of $20,000. 7. After 2 years, demand for the clothing produced by the machine has declined and they estimate that the machine will yield net cash flows of 23,000 each of the next three years (assume cash flows occur at the end of the year). Assume a discount rate of 10% and straight-line depreciation. What impairment does Third Eye Blind recognize at this time (rounded to the nearest dollar)? (Hint: Discounted cash flows approximate fair value)

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Expert Solution

Step 1 -: Computation of Carrying value of the asset

Machinery cost -: $100,000

Estimated Life - 5 years and Residual value-: $20,000

Depreciation per year -: ($100,000 - $20,000) / 5 years = $16,000

WDV of the machinery at the end of two years = $100,000 - ($16,000 X 2 years) = $68,000

Carrying Value of the asset -: $68,000

Step 2 -: Computation of recoverable value from the asset

Particulars	Year 1	Year 2	Year 3
Net Cash Flow	$ 23,000	$ 23,000	$ 23,000
PV Factor	0.9091	0.8264	0.7513
Total present value of cash flow	$ 20,909	$ 19,008	$ 17,280

Total recoverable value	$ 57,198

Step 3-: Impairment loss -: Carrying Value - Recoverable amount

=$68,000 - $57,198

=$10,802

The Company needs to account for $10,608 as an impairment loss in the financial statements.

ekkarill92 answered 1 year ago

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