How would I even approach this problem? ALso why is something impaired or not? I

Question

How would I even approach this problem? ALso why is something impaired or not?

Impairment Loss On May 1, 2013, Silky, Inc., purchased machinery for $345,000; the estimated useful life was eight years and the expected salvage value was $15,000. Straight-line depreciation is used. On May 1, 2015, economic factors cause the market value of the machinery to decrease to $190,000. On this date, Silky evaluates whether the machinery is impaired. a. Assume that on May 1, 2015, Silky estimates future cash flows relating to the use and disposal of the machinery to be $270,000. Is the machinery impaired at May 1, 2015? If it is impaired, what is the amount of the impairment loss? The machinery is not impairedx Impairment loss = $ 80,000 b. Assume that on May 1, 2015, Silky estimates future cash flows relating to the use and disposal of the machinery to be $230,000. Is the machinery impaired at May 1, 2015? If it is impaired, what is the amount of the impairment loss? The machinery is impaired Impairment loss = $ 40,000 x Check

Explanation / Answer

Impairment loss is measured as the excess of carrying amount of the asset over its recoverable amount.

-Recoverable amount: “The higher of its fair value less costs to sell and its value in use.”

Value in use: -Discounted expected future cash flows.

Lets calulate the carrying amount

Depreciation = (Cost of Purchase - Salvage value)/ Life of asset

= (345000-15000)/8

= 41,250

Lest calulate the book value

Carrying value of asset $ 262,500

exptected Cashflow from machinery is $ 270,000

Since expected cashflow is more than carrying value - there will be no impairment.

Imapairement loss willbe $0

b.

Carrying value of asset $ 262,500

exptected Cashflow from machinery is $ 230,000

Since expected cashflow is less than carrying value - there will be impairment of machinery

Impairment loss = carrying cost- Expteced cashflow

=262500 - 230000

= 32,500

Year Opening Balance Depreciation Closing value          1 $ 345,000 $       (41,250) $        303,750          2 $ 303,750 $       (41,250) $        262,500

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