Accounting Issues memo

As part of the Financial Statement & Disclosure Impacts section, you will need to prepare appropriate entries for the period 1/01/X24 - 12/31/24, including amounts. There must be explanations for how the amounts used for the entries were computed. The journal entries will require the use of present value concepts. You should include the Codification references that support the entries you recommend in the analysis section.

Case: Assume that Fireworks Emporium has finished construction of a new retail outlet along Highway 30 and has capitalized $4.5 million related to the building as of the store's opening on 1/1/20X4. Fireworks Emporium depreciates the carrying value of the store over 20 years using straight-line depreciation.

As of 12/31/X4, Fireworks Emporium has observed the following recent challenges and asks you whether it is required to test the store for impairment: 1) Monthly sales have fallen by 20% since the store was opened, partially due to a construction project on Highway 30 that has reduced traffic flow to the area. 2) As a result of the slide in monthly sales, the store operated at a deficit in October, November, and December of 20X4.3) The S&P 500 stock market index has slid 300 points, or 8%, during 20X4. 4) Local real estate values have dropped this year, and nearby properties are selling at an average of 15% below their list prices.

As of 12/31/X4, Fireworks Emporium estimates the store will produce net cash inflows of $175,000 in year 2, and that its net cash inflows will grow by 2.5% in each year after year 2. Fireworks Emporium's incremental borrowing rate is 5%. To estimate fair value, Fireworks Emporium typically uses a discounted cash flow approach.

Is the store required to be tested for impairment? Should Fireworks Emporium impair the current carrying value of the building at 12/31/X4? Provide the entries required to record the building on 1/1/20X4, to recognize depreciation at each quarter during 20X4, and then show the entries required at 12/31/X4 (including impairment charges, if any). Assume that Fireworks Emporium issues quarterly financial statements.