As a CPA at Smith & Lawrence, LLP, you are the auditor for Heavenly Travel, Inc. (Heavenly), a nonpublic company that provides charter flights throughout the northern hemisphere. Heavenly owns and operates one Boeing 747 jet which it acquired using nonrecourse debt. There are identifiable cash flows associated with the plane that are largely independent of the cash flows of other asset groups owned by the company. There is also a bank account that is used solely for the operations of the plane.

Unfortunately, due to the actual and potential eruptions of volcanoes in Iceland, an area where the plane frequently flies, the operating performance has significantly declined. This has led to a decline in its overall fair value. During 2022, Heavenlys annual operating cash flows from the plane declined by 30 percent to $1.5 million, and its annual operating cash flows are expected to continue to decline in the future. Because of this decline in the planes fair value and operating performance, Heavenlys management is evaluating the following possible options for proceeding into 2023 and beyond:

A. Continue operating the plane in the current area.

B. Operate the plane in a new area without volcano risk.

C. Operate the plane in the current area through December 31, 2023, then turn the plane over to the lender (have the lender foreclose on the plane on January 1, 2024). Since Heavenly will let the plane be foreclosed on January 1, 2024, no repairs or maintenance will be done during 2023 so the net cash flows from operations will be a bit higher than Option A.

The following table presents the management of Heavenlys estimate of future cash flows from each of the alternatives. Management has also estimated how likely they are to follow alternative A, B or C.

		Estimated Cash Flows (in $ millions)
Option	Probability of Occurring	2023	2024	2025	2026	2027	Total
A	15%	$1.0	$0.9	$0.7	$0.7	$0.8	$4.1
B	25%	$0.6	$0.8	$1.1	$1.5	$1.9	$5.9
C	60%	$1.1	$3.1[1]				$4.2

[1] Properly includes the ships FMV of $3.1 million as cash flow. Cash flows from foreclosure of nonrecourse debt is limited to the FMV of the surrendered asset.

As of December 31, 2022, the planes estimated fair value is $3.1 million, net book value is $4.8 million, and estimated remaining useful life is five years. In addition, the net carrying value of the nonrecourse debt is $4.0 million and there is $100,000 of cash in the bank account directly attributable to the plane. These are the only assets you must consider. Heavenly has other lines of business but they are unrelated to the charter flights.

Note: The fact that the debt is nonrecourse means that, for purposes of estimating cash flow from the foreclosure, debt up to the fair value of the plane is included. Debt in excess of the fair value of the plane is not part of cash flows. Option C correctly shows cash flow for the foreclosure on January 1, 2024.

Required

Prepare an Accounting Research Memo to the Heavenly Travel, Inc. 2022 Audit File. Since the events indicate that the carrying amount of the asset group may not be recoverable, a test for recoverability and possible asset impairment is needed.