please find the impairment loss for the assets 1. (10 pts) Assume you are the co

Question

please find the impairment loss for the assets

1. (10 pts) Assume you are the controller of Beacon Commercial Real Estate and you are beginning the 2010 fiscal year. Beacon is in the business of constructing and leasing shopping malls in the northeast United States In 1990, you constructed a shopping mall in Scranton, PA at a total capitalized cost of $15,000,000. You placed the asset in service on July 31, 1990. You estimate t has a service life of 30 years, a salvage value of 250,000, and you depreciate it using the straight line method The shopping mall has a total of 110 leasable units. In 2008, you leased 100 units at an average of $15,000 per unit. However, due to the recession in 2009, several boutique shops have declared bankruptcy and you are now only leasing out 85 units at an average of $13,500 per year. Based on current market con dit ons, you b elieve this condition will persist until 2012 Starting at the beginning of 2012, you estimate y will have 95 units leased at an average of 15,000 annually until the end of 2015 You do not plan on selling the mall at the end of 2015 (Assume all lease payments are received at the end of the year) Don't forget the interest, depreciation, and taxes in computing cash flows. Assume the following capital structure 5,500 5.25 coupon bonds outstanding ($1,000 face value 10 years to Debt maturity, selling for 88% of par; the bonds make semiannual interest payments Common Stock 250,000 shares outstanding, selling for $25 per share, the beta is 0.87 Market 7.5% total expected market return with a risk-free rate of 1.75% 30% effective tax rate Taxes

Explanation / Answer

As per IAS 36, An asset is impaired when its carrying amount is greater than its recoverable amount.

The carrying amount of an asset is the amount shown in the accounting records. The recoverable amount of an asset is in fact the asset’s “real value” .

So, when accounting records show the assets at higher amounts than their “real value”, then there is an impairment of assets and we should recognize some impairment loss.

In 2008, Impairment losses are calculated as under :

Depriciation per year = (15000000-250000)/30

= 491667

Recoverable Amount

Cost of Debt = 5.25 - 30%(Tax rate)

= 3.675

Cost of equity (CAPM Model) = Rf + Beta (RM-Rf)

= 1.75 + 0.87(7.5-1.75)

= 6.7525

WACC = (625000/1109000)*6.7525 + (484000/1109000)*3.675

= 5.41

Since, recoverable amount is higher than carrying amount there is no impairment loss.

In 2015, Impairment losses are calculated as under :

Recoverable Amount

Since, recoverable amount is higher, there is no Impairment loss

Accumulated Dep till 2008 (18 years) 8850000 a) Carrying Amount after 2008 6150000

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