7. Carter Company purchased equipment that manufacturers Kangaroo Boo shoes, in

Question

7. Carter Company purchased equipment that manufacturers Kangaroo Boo shoes, in 2014 for $10,000,000 (its fair market value at the time of acquisition). The company has recorded $2,000,000 in depreciation through December 31, 2015. Due to the introduction of a wildly popular competitor, the sales of the Kangaroo Boo shoe are expected to decrease. Carter is projecting future net cash flows for Johnston over the next five years as follows:

2016 - $3,000,000

2017 - $2,000,000

2018 - $1,000,000

No net cash flows are expected after 2018. The fair value of the equipment, based on discounted cash flows at 10% required rate of return is $4,592,000.

a. Is the equipment impaired? Show calculations.

b. If there is an impairment, calculate the impairment and prepare the journal entry to record the impairment.

Explanation / Answer

Answer a. Book Value of Equipment = $10,000,000 - $2,000,000 Book Value of Equipment = $8,000,000 Total Future Net Cash Flows = $3,000,000 + 2,000,000 + $1,000,000 Total Future Net Cash Flows = $6,000,000 Impairment Test: And asset is impaired if: Sum of undiscounted expected cash flows

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