Asset impairment:

An asset is impaired if:

Book value > future cash flows

a).

Let us see whether the asset is impaired or not;

Annual depreciation =

=

=

Book value of the asset = Actual value - Annual depreciation

Book value of the asset in 2009 can be calculated as follows. To get the book value of the asset in 2009 we have to deduct the depreciation in 2007 and 2008 from actual value.

Book value = 275,000 - (50,000 + 50,000)

= 175,000.

Future cash inflows = 150,000

Here book value (175,000) > Future cash inflows (150,000)

So the asset is impaired.

(b).

Impairment loss = Net book value - Fair value

Net book value in 2009 = 175,000

Fair value = 110,000

So impairment loss = 175,000 - 110,000

Impaiment loss = $65,000

Costoftheasset - Residual value Lifeoftheasset 275, 000 - 25,000 5 years 250,000 5 years = 50, 000 peryear Costoftheasset - Residual value Lifeoftheasset 275, 000 - 25,000 5 years 250,000 5 years = 50, 000 peryear