Reference no: EM132966110

The abrasives group of Chemical Products Inc. (CPI) has been suffering a decline in its business, due to new product introductions by competitors. At 31 December 20X5, the assets of the abrasives cash-generating unit are shown as follows (in millions) on the company's SFP:

                                                  Cost             Accumulated Depreciation             Net book value
Equipment (10 -year life)          400                            180                                   220
Fixtures (10 year life)               125                             55                                       70
Patent rights (40 year life)           80                           70                                          10
Totals                                    $605                          $305                                         $300

An impairment test indicates that the recoverable amount of the abrasives cash-generating unit's assets is $200 million. The assets are not separable-they must be operated or sold together as a group. No individual asset has a determinable individual fair value less cost to sell.

Required:

Problem 1: Prepare an adjusting journal entry to record the impairment.

Problem 2: What would be the net book value of the assets after one year if no impairment was recorded? Assume that straight-line depreciation is used.

Problem 3: After one year, the recoverable amount is reassessed because of changes in the competitive market, and is found to be higher than $200 million. Describe how the impairment reversal would be allocated to the various assets of the unit.