QUESTION 10 On March 1, 2010, Thomas Company acquired a machine for $3,000,000 a
ID: 2519885 • Letter: Q
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QUESTION 10 On March 1, 2010, Thomas Company acquired a machine for $3,000,000 and estimates a 10 year life, $150,000 salvage and uses the Double-Declining- Balance method for this class of asset. At the end of 2013 (after recording depreciation for the current year), Thomas determined it was necessary to evaluate this equipment for impairment. The company estimates this equipment will generate cash inflows of $400,000 per year and cash outflows of $150,000/year for each of the next four years. The company uses a 15% discount rate to evaluate operating assets. Determine the amount of any impairment loss to be recognized if Thomas plans to dispose of this asset. The present value of an ordinary annuity of 15% is 2.85498; present value of $1 is 0.57175; and future value of annuity is 4.99338. Thomas believes the present value is a good indicator of fair value in today's market. They also feel that a reasonable estimate for disposal costs is $13,745Explanation / Answer
The machine was purchased for 3 years and therefore the depreciation must have been charged for 2010, 2011, 2012 and 2013 at double declining method.
Depreciation = (3,000,000 - 150,000) / 10 = $285,000
Depreciation is charged on double declining method therefore depreciation will be $570,000 for year 1
since machine was purchased in March 2010 the depreciation will be charged for 10 months only
570,000 x 10/12 = $475,000
Net asset at the begining of 2011 = 3,000,000 - 475,000 = $2,525,000
Depreciation for 2011 = (2,525,000 / 10 ) x 2 = $505,000
Net Asset at begining of 2012 = $2,525,000 - $505,000 = $2,020,000
Depreciation for 2012 = ($2,020,000 / 10 ) x 2 = $404,000
Net asset at begining of 2013 = $2,020,000 - $404,000 = $1,616,000
Depreciation for 2013 = ($1,616,000 / 10) X 2 = $323,200
Net asset at the end of 2013 = $1,616,000 - $323,200 = $1,292,800
The inflows of the company are 400,000 per year and out flows are 150,000 therefore the net inflow is $250,000
The present value of all the cash flows over the next four years = $250,000 x 2.85498 = $713,745
Present value of the disposal cost = $13,745 x 0.57175 = $7858
Total cashflows expected = $713,745 - $7,858 = $705,887
Impairment loss = $1,292,800 - $705,887 = $586,913
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