Question
Lock Company owns specialized equipment that was purchased in an acquisition of Bolt Company. The equipment has a book value of $1,950,000, but according
Lock Company owns specialized equipment that was purchased in an acquisition of Bolt Company. The equipment has a book value of $1,950,000, but according to IFRS 13, it is assessed for impairment on an annual basis. To perform this impairment test, Lock must estimate the "value" of the equipment, comparing the Fair Market Value (value if we sold now) to a value-in-use model (income-based if we keep the asset). It has determined the cash flow estimates related to the equipment based on internal information for the next 6 years to be $200,000 per year. The equipment is assumed to have $80,000 residual value after the 6 years. (Assume the cash flows occur at the end of each year.). Lock company could sell the equipment today for $900,000. a) Lock determines, using their own assumptions, that the appropriate discount rate for this estimation is 5%. To the nearest dollar, what is the estimated "value in use" using the income based model? (3 marks) b) Comparing the Fair Market Value to the Value in Use, should Lock Keep the equipment or sell the equipment? Why? (2 marks)
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