Accounting Issues Memo

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 1/1/2024. Fireworks Emporium depreciates the carrying value of the store over 20 years using straight-line depreciation.

As of 12/31/2024, 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 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 2024. 3) The S&P 500 Stock market index has slid 300 points, or 8% during 2024. 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 12/31/2024, 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.

Required:

Is the store required to be tested for impairment? Should Fireworks Emporium impair the current carrying value of the building at 12/31/2024? Provide the entries required to record the building on 1/1/2024, to recognize depreciation at each quarter during 2024, and then show the entries required at 12/31/2024 (including impairment charges, if any). Assume that Fireworks Emporium issues quarterly financial statements.