Tangible Asset Impairment. Chrispian Cookies, Inc. is reviewing all available information regarding the future use of its baking equipment, which it intends to use for the foreseeable future. The information indicates that this equipment may be obsolete and could be impaired. Chrispian acquired the equipment 3 years ago at a cost of $9,000,000 and
At the end of the third year, management estimates the following cash flows from the use of the asset:
Future Period | Cash-Flow Projection |
Year 1 | $1,800,000 |
Year 2 | 1.600,000 |
Year 3 | 980,000 |
Year 4 | 890,000 |
Year 5 | 730,000 |
Total | $6,000,000 |
The asset is highly specialized and is not traded in an active market. As a result, the fair value of the asset must be estimated Chrispian’s cost of capital is 6%.
Required
- a. Conduct an impairment test for Chrispian’s baking equipment.
- b. Prepare the
journal entry to record any impairment loss indicated. - c. Compute the amount of the revised depreciation expense at the end of the next year. Assume that management now estimates that there will be no residual value at the end of the asset’s life.
- d. The estimated fair value at the end of the next year is $4,400,000. The sum of the undiscounted future cash flows exceeds the asset’s carrying value. Compare the carrying value of the asset to its fair value. Explain how to treat the difference between the asset's carrying value and fair value.
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Intermediate Accounting
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