China Factory. bought a machine on January 1, 2004 for $400,000. The machine had

Question

China Factory. bought a machine on January 1, 2004 for $400,000. The machine had an expected life of 20 years and was expected to have a salvage value of $40,000. On July 1, 2014 (10 ½ years into the asset’s life), the company reviewed for potential impairment of the machine and determined that its undiscounted future net cash flows totaled $200,000 and its discounted future net cash flows totaled $140,000. If no active market exists for the machine and the company does not plan to dispose of it, what should China Factory record as an impairment loss on July 1, 2014? (hint: need to calculate book value up to date of potential impairment).

Answer Choices: A). $0 B). $20,000 C).$71,000 D).$11,000
Please show all work. Thank you!

Explanation / Answer

Ans: Option C

       Book value of Machine = Asset value- Depreciation charged

                                         =400000- (400000-40000)/20 years x 10.5 Years

                                         = $ 211000

       Impaired value of Machine = Higher of Faair Value of Machine or discounted future net cash flows

                                             = $ 140000

               Impairment Loss = $ 211000-140000

                                         = $ 71000

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