Reference no: EM131296125
On January 1, 2010, Company purchased a factory for $180,000 and machinery for $1 million. It is depreciating the factory over 30 years and the machinery over 20 years, both by the straight-line method to zero residual values. Late in 2015, because of technological changes in the industry and reduced selling prices for its products, the company believes that its asset(s) may be impaired and will have a remaining useful life of eight years. The cash flows from the factory and machinery are not separable, and are independent of the company’s other activities. The company estimates that the asset will produce cash inflows of $400,000 and will incur cash outflows of $295,000 each year for the next 8 years. It is not able to determine the fair value of the asset based on a current selling price of the factory and machinery. The company’s discount rate is 12%.
Required
1. Prepare schedules to determine whether, at the end of 2015, the machinery is impaired and, if so, the impairment loss to be recognized.
2. Prepare the journal entry to record the impairment.
3. How would your answer to Requirement 1 change if the discount rate was 16% and the cash flows were expected to continue for 6 years?
4. Refer to Requirement 1. It determines that the fair values of the building and machinery are $120,000 and $450,000, respectively, and estimates that it would cost $5,000 and $12,000 to sell the building and machine, respectively. How much would the company recognize as the impairment loss?
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