Question

Sunshine Corporation operates a manufacturing plant in Nevada. Due to a significant decline in demand for the product manufactured at the Nevada site, an impairment test is deemed appropriate. Management has acquired the following information for the assets at the plant: Cost $500,000; Accumulated depreciation $175,000; Sunshine’s estimate of the total cash flows to be generated by selling the products manufactured at its Nevada plant, not discounted to present value $300,000. The fair value of the Nevada plant is estimated to be $255,000. The amount of impairment loss recognized should be:

Answer 1

Answer: $70,000

Step-by-step explanation:

Impairment is said to exist if the Carrying amount of an Asset exceeds it's value of Future cashflows.

Calculating the Carrying amount therefore gives,

= Cost - Accumulated Depreciation

= 500,000 - 175,000

= $325,000

$325,000 > $300,000.

The Carrying Value is greater than the future cashflows so Impairment exists.

Impairment is calculated by,

= Carrying Amount - Fair Value

= 325,000 - 255,000

= $70,000

The amount of impairment loss recognized should therefore be $70,000.