General Optic Corporation operates a manufacturing plant in Arizona. Due to a si
ID: 2582152 • Letter: G
Question
General Optic Corporation operates a manufacturing plant in Arizona. Due to a significant decline in demand for the product manufactured at the Arizona site, an impairment test is deemed appropriate. Management has acquired the following information for the assets at the plant: Cost $ 42,500,000 Accumulated depreciation 15,200,000 General’s estimate of the total cash flows to be generated by selling the products manufactured at its Arizona plant, not discounted to present value 17,000,000 The fair value of the Arizona plant is estimated to be $16,000,000.
Required: 1. & 2. Determine the amount of impairment loss. If a loss is indicated, where would it appear in General Optic’s multiple-step income statement?
3. If a loss is indicated, prepare the entry to record the loss.
4. & 5. Determine the amount of impairment loss assuming that the estimated undiscounted sum of future cash flows is $17,000,000 instead of $17,000,000 and $27,950,000 instead of $17,000,000.
Explanation / Answer
Solution:-
Imapairment occurs when the carrying amount of an assets is greater then the total of Future cash flows generated from the assets. Even the organisation will get the tax benefit for the same, but it is bad for the organisation as it arises the need of reinvestment.
1. Carrying Amount:- Cost -Depreciation
= 42,500,000 - 15,200,000 = $27,300,000
Total of Future Cash Flows:- $17,000,000
So the Impairment Loss = 27,300,000 - 17,000,000 = $10,300,000
2. Impariment Loss will be charges to profit and loss account under the head "Other Operating Income and Expenses".
3. Impairment Loss A/c Dr 10,300,000
To Assets A/c 10,300,000
(Being Assets Impaired)
4. If Value of Future Cash Flows is $ 27,950,000 instead of $ 17,000,000
As Carrying Cost is less then Future Cash flows generated from the assets,there is no Impairment Loss.
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