Intermediate Accounting

P12-2

Tangible Asset Impairment. Chrispian Cookies, Inc. is reviewing all available information regarding the future use of its baking equipment, which it intends to use for the foreseeable future. The information indicates that this equipment may be obsolete and could be impaired. Chrispian acquired the equipment three years ago at a cost of $9,000,000 and depreciated it using the straight line method with an estimated residual value of $1,800,000 and an eight year useful life. At the end of the third year, management estimates the following cash flows from the use of the asset:

Future Period Cash Flow Projection

Year 1 $1,800,000

Year 2 $1,600,000

Year 3 $980,000

Year 4 $890,000

Year 5 $730,000

Total $6,000,000

The Asset is highly specialized and is not traded in an active market. As a result, the fair value of the asset must be estimated. Chrispians cost of capital is 6%.

Required:

A) Conduct an impairment test for Chrispians baking equipment.

B) Prepare the journal entry to record any impairment loss indicated.

C) Compute the amount of the revised depreciation expense at the end of the next year. Assume that management now estimates that there will be no residual value at the end of the assets life.

D) The estimated fair value at the end of the next year is $4,400,000. The sum of the undiscounted future cash flows exceeds the assets carrying value. Compare the carrying value of the asset to its fair value. Explain how to treat the difference between the assets carrying value and fair value.