General Optic Corporation operates a manufacturing plant in Arizona. Due to a si

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:

  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

The fair value of the Arizona plant is estimated to be $12,000,000.

1)

Determine the amount of impairment loss assuming that the estimated undiscounted sum of future cash flows is $20,500,000 instead of $15,400,000.(Enter your answer in whole dollars.) ?

  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

Explanation / Answer

Impairment loss = Carrying value ( book value of asset) > recoeverable value

Recoverable value is taken higher of fair value or present value of the future net cash flows

carrying value     = $20,100,000 > recoverable value $15,400,000

          impairment loss = $20,100,000 - $12,000,000 = $8,100,000

2) In second case there will be no impairment since the carrying amount is less than recoverable amount

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