Question

Sanders Corporation operates a factory in Arizona. Due to a change in business climate an impairment test is deemed appropriate. Management has acquired the following information: Cost $243,000,000 Accumulated depreciation 112,000l,000 Estimate of the total undiscounted future cash flows 110,000,000 Present value of estimated future cash flows 94,000,000 Estimated fair value of the Arizona factory, as appraised 90,000,000 Required: a) Determine the amount of the impairment loss if any. b) If a loss is indicated, prepare the entry to record the loss.

Answer 1

Answer:

a. The amount of impairment loss is $37,000,000.

Explanation:

a.

Given,

Fair Value = $90,000,000

PV of estimated cash flow = $94,000,000

Recoverable Amount = Whichever is higher from Fair Value OR PV of estimated cash flow

So,

Recoverable Amount = $94,000,000

The formula to compute Carrying amount is:

Carrying Amount = Cost - Accumulated Depreciation

                             = $243,000,000 - $112,000,000

                            = $131,000,000

The asset is impaired when the recoverable amount is less than the carrying amount.

So, in this case, the amount of recoverable is less than carrying amount. Therefore, the asset is impaired.

And Impairment loss is computed as:

= Carrying amount - Recoverable Amount

= $131,000,000 - $94,000,000

= $37,000,000

b.

Journal Entry is as:

Impairment Loss on Equipment A/c..............Dr   $37,000,000

               To Equipment A/c.....................................Cr   $37,000,000