Exercise 6-22

Pearl Company owns a trade name that was purchased in an acquisition of McClellan Company. The trade name has a book value of $3,500,000, but according to GAAP, it is assessed for impairment on an annual basis. To perform this impairment test, Pearl must estimate the fair value of the trade name. It has developed the following cash flow estimates related to the trade name based on internal information. Each cash flow estimate reflects Pearls estimate of annual cash flows over the next 8 years. The trade name is assumed to have no salvage value after the 8 years. (Assume the cash flows occur at the end of each year.)

Cash Flow Estimate			Probability Assessment
$385,900			20%
632,600			50%
752,500			30%

Click here to view factor tables (a) What is the estimated fair value of the trade name? Pearl determines that the appropriate discount rate for this estimation is 8%. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Estimated fair value