The Winslett Company buys a retail store on January 1, Year One, with a ten-year

Question

The Winslett Company buys a retail store on January 1, Year One, with a ten-year life and a cost of $800,000. No residual value is anticipated. Straight-line depreciation is used. The building was bought because the company believed that it could generate post-cash flows of $98,000 per year. On January 1, Year Four, a new road is opened in the area that takes much of the traffic away from the store. For the remainder of its life, the company only expects to generate a positive cash flow of $82,000 per year. An appraisal is made that indicates the building has a fair value of only $480,000. What recording should be made on that date for this building? a. No change should be made. b. A loss of $77,000 is recognized. c. A loss of $80,000 is recognized. d. A loss of $82,000 is recognized.

Explanation / Answer

Straight line depreciation amount of Building per year = 800000/10 = 80000

Accumulated depreciation on building for 3 years = 80000*3 = 240000

Book Value of Building on January 1, Year Four = 800000 - 240000 = 560000

Fair Value of Building on January 1, Year Four = 480000

Impairment loss to be recognised = 560000 - 480000 = 80000

Answer is c. A loss of $80,000 is recognized.

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