Electroboy Enterprises, Inc. operates several stores throughout the western United States. As part of an operational and financial reporting review in a response to a downturn in its markets, the company’s management has decided to perform an impairment test on five stores (combined). The five stores’ sales have declined due to aging facilities and competition from a rival that opened new stores in the same markets. Management has developed the following information concerning the five stores as of the end of fiscal 2019.

Original cost.......................................................$36 million
Accumulated depreciation...............................$10 million
Estimated remaining useful life.......................4 years
Estimated expected future
annual cash flows (not discounted).................$4.0 million per year
Appropriate discount rate.................................5 percent

Accounting

a. Determine the amount of impairment loss, if any, that Electroboy should report for fiscal 2019 and the book value at which Electroboy should report the five stores on its fiscal year-end 2019 balance sheet. Assume that the cash flows occur at the end of each year.

b. Repeat part (a), but instead assume that (1) the estimated remaining useful life is 10 years, (2) the estimated annual cash flows are $2,720,000 per year, and (3) the appropriate discount rate is 6 percent.

Analysis

Assume that you are a financial analyst and you participate in a conference call with Electroboy management in early 2020 (before Electroboy closes the books on fiscal 2019). During the conference call, you learn that management is considering selling the five stores, but the sale won’t likely be completed until the second quarter of fiscal 2020. Briefl y discuss what implications this would have for Electroboy’s 2019 financial statements. Assume the same facts as in part (b) above.

Principles

Electroboy management would like to know the accounting for the impaired asset in periods subsequent to the impairment. Can the assets be written back up? Briefly discuss the conceptual arguments for this accounting.

Analytics in Action

Accounting software systems collect vast amounts of data about the economic events experienced by a company and about the parties with whom the company engages, such as suppliers and customers. Business decision-makers take advantage of this wealth of information by using data analytics, which often employs both software and statistics, to draw inferences and make more informed business decisions. As both data access and analytical software improve, the use of data analytics to support decisions is becoming increasingly common at virtually all types of companies.

Evaluating long-lived assets for possible impairment requires developing estimates of future cash flows and net realizable value compared to the carrying value of the asset, based on the depreciation method used.

Instructions

Go to WileyPLUS for a data analytics exercise focusing on analysis of company information related to depreciation and impairment of property, plant, and equipment.