Question

Henry Co. manufactures DVD players. At the end of Year 1, Henry's management believes the growing popularity of streaming video content will reduce the demand for Henry's DVD players. The DVD players are manufactured using specialized equipment with a historical cost of $3,000,000 and accumulated depreciation of $1,520,000. The managers estimate the equipment has a remaining useful life of 4 years and will generate the following undiscounted cash flows:

Year 2 $ 540,000

Year 3 420,000

Year 4 190,000

Year 5 125,000

Salvage value 50,000

If the equipment were sold today, the sales price would be $1,600,000. Is the equipment considered impaired, why or why not?

Not impaired because the fair value of the equipment is greater than the carrying value of the asset by $120,000.

Yes impaired because undiscounted cash flow are lower than the carrying amount of the asset by $155,000.

Cannot determine impairment without discounted cash flows.

Yes impaired because the undiscounted cash flows are less than the fair value of the equipment by $275,000.

Answer 1

Not impaired because the fair value of the equipment is greater than the carrying value of the asset by $120,000.

Step-by-step explanation:

Impairment will occur if conveying sum is more noteworthy than the reasonable estimation of the benefits, here the conveying estimation of the advantages is 1,480,000, which is lessor than the reasonable estimation of the benefits 1,600,000 by 120,000. Henceforth impairment won't occur.

Answer 2

Not impaired because the fair value of the equipment is greater than the carrying value of the asset by $120,000.

Step-by-step explanation:

Impairment will happen if carrying amount is greater than the fair value of the assets, here the carrying value of the assets is 1,480,000, which is lessor than the fair value of the assets 1,600,000 by 120,000. Hence impairment will not happen so 1st option is correct.