Four years ago Omega Technology, Inc., acquired a machine to use in its computer chip manufacturing operations

Question:

Four years ago Omega Technology, Inc., acquired a machine to use in its computer chip manufacturing operations at a cost of $35,000,000. The firm expected the machine to have a seven-year useful life and a zero . The company has been using straight-line depreciation for the asset. Due to the rapid rate of technological change in the industry, at the end of Year 4, Omega estimates that the machine is capable of generating (undiscounted) future cash flows of $11,000,000. Based on the quoted market prices of similar assets, Omega estimates the machine to have a fair value of $9,500,000.

Required:
1. What is the machine’s book value at the end of Year 4?
2. Should Omega recognize an impairment of this asset? Why or why not? If so, what amount of the impairment loss should be recognized?
3. At the end of Year 4, at what amount should the machine appear in Omega’s balance sheet?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...