Question

A company bought machinery on January 1, 2016, for $200,000. On January 1, 2018, the machinery had a book value of $100,000. It is estimated that the machine will generate future cash flows of $70,000 and its current fair value is $60,000. How much impairment loss should be recorded

Answer 1

The impairment loss that should be recorded is:

= $40,000.

Step-by-step explanation:

a) Data and Calculations:

Cost of machinery on January 1, 2016 = $200,000

Book value of machinery on January 1, 2018 = $100,000

Estimated future cash flows from the machinery = $70,000

Estimated fair value of the machinery = $60,000

Impairment loss to be recorded = Book value Minus Fair Market Value

= $40,000 ($100,000 - $60,000)

b) The impairment loss is calculated as the difference between the asset's carrying cost of $100,000 and the lower market value of $60,000 instead of $70,000.