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:
Accumulated depreciation 14,200,000
General's estimated of the total cash flow
to be generated by selling the products manufactured
at its Arizona plant, not discounted to present value 15,000,000
The fair value of the Arizona plant is estimated to be $11,000,000.
1. Determine the amount of impairment loss, if any.
2. 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. Repeat requirement 1 assuming that the estimated undiscounted sum of future cash flows is $12,000,000 instead of $15,000,000.
5. Repeat requirement 1 assuming that the estimated undiscounted sum of future cash flows is $19,000,000 instead of $15,000,000
To determine whether an asset is impaired, FASB No. 144 requires that the asset's carrying value (i.e., its cost less its accumulated depreciation) be compared to the sum of its estimated undiscounted future cash flows. If the carrying amount is less than that sum, the asset is not impaired; if the carrying amount exceeds the sum, the asset is impaired. If the asset is impaired, the asset is written down from its carrying value to its fair market value, assuming that the fair market value exceeds the carrying value. (Assets cannot be "written-up" to their fair market values.) The write-down for the impairment is a component of the company's net income from continuing operations (i.e., a normal operating expense). Once impaired, the asset is revalued to its new carrying value (i.e., it no longer has a cost and associated accumulated depreciation).
This solution discusses the FASB dealing with asset impairment losses. It then illustrates how to compute the asset impairment, determine if there is a loss and how much, and how to record the loss as a journal entry and report the loss on the multiple-step income statement.