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 $ 39.5 million
Accumulated depreciation $ 14.9 million
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 $ 16.4 million

The fair value of the Arizona plant is estimated to be $14.5 million.
Required:

1. Determine the amount of impairment loss.

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

3. & 4. Determine the amount of impairment loss assuming that the estimated undiscounted sum of future cash flows is (3) $15.5 million instead of $16.4 million and (4) $24.85 million instead of $16.4 million.

Answer 1

The amount of impairment loss is $10.1 million. The entry to record the loss is to debit an expense account and credit the asset account for $10.1 million. If the estimated undiscounted sum of future cash flows is $15.5 million, the impairment loss is still $10.1 million. If the estimated undiscounted sum of future cash flows is $24.85 million, there is no impairment loss.

Step-by-step explanation:

To determine the amount of impairment loss, we need to compare the fair value of the Arizona plant with its carrying amount. The carrying amount is the cost of the asset minus accumulated depreciation, which in this case is $39.5 million - $14.9 million = $24.6 million.

The impairment loss is the difference between the carrying amount and the fair value, which in this case is $24.6 million - $14.5 million = $10.1 million. So, the amount of impairment loss is $10.1 million.

To record the impairment loss, we need to debit an expense account (e.g., Impairment Loss) and credit the asset account (e.g., Arizona Plant) for the amount of the impairment loss, which is $10.1 million.

If the estimated undiscounted sum of future cash flows is $15.5 million instead of $16.4 million, the impairment loss would be the carrying amount minus the fair value, which is $24.6 million - $14.5 million = $10.1 million.

If the estimated undiscounted sum of future cash flows is $24.85 million instead of $16.4 million, there would be no impairment loss because the carrying amount of $24.6 million is less than the fair value of $24.85 million.