Description:

Part 1:

You work for Sir Holds-a-Lot, a public storage company operating 7 warehouses in the Illinois. During the year 20x1, you identified the Rock Island and Winnetka locations as performing especially poorly. Upon bringing these locations to the attention of the Chief Financial Officer, the executive committee determined the Rock Island location would be closed and the Winnetka location would continue operating. Both locations have a cost of $1,000,000, an accumulated depreciation of $300,000, and no salvage value. You determined the likely cash flow (undiscounted) of the Winnetka location is $100,000 for the next 5 years and then $0 thereafter. If the cash flows were to be discounted, they would need to be discounted at a rate of 12% per year. The appraised value (fair market value) of the Rock Island location is $400,000.

You know the auditors will be paying specific attention to any manual journal entries you make in regards to adjusting the value of these two locations. As such, you will need to be diligent about detailing how you arrived at your conclusion about the appropriate accounting for the Rock Island location (which is held for sale) and the Winnetka location (which is held for use).

Use the IRAC (Issue, Rule, Application, Conclusion) format to document your proposed journal entry for both locations. It is up to you to determine if you will need to write one or two memos to deal with the two issues (submit one document, though).

Part 2:

The following year (20x2), the Winnetka location begins to outperform expectations and the future cash flow is projected to be $150,000 for the next four years. The carrying value of the Winnetka location in 20x2 is $600,000 ($1 million cost, and $400,000 accumulated depreciation). Use the ASC and discuss if the Sir Holds-a-Lot needs to make an adjusting entry for this new expectation.

Also in 20x2, the Rock Island location was re-appraised to be worth $700,000. Use the ASC and discuss if the Sir Holds-a-Lot needs to make an adjusting entry for this new expectation.