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 to
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 annuak basis. To perform thus impairment test, Lock must estimate the value of the equipment, comparing the Fair Market Value to a value-in-use model. 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 equipment today for $900,000.
a. Lock determines, using their own assumptions, that the appropriate discount rate for thus estimation is 5%. To the nearest dollar, what is estimated value in use using the income based model
b. Comparing tge Fair Market Value to the Value in Use, should Lock keep the equipment or sell the equipment? Why?
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