Part A (5 marks)

Omega Company, a public company, must perform an impairment test on some specialized equipment that it owns. The equipment will produce the following cash flows at the end of each year: Year 1, $55,000; Year 2, $40,000; Year 3, $40,000 and Year 4, $40,000. The discount rate is 6%. The value in use, which is also equal to the fair value as equipment will not be sold, is equal to the present value of the estimated cash flows from the equipment.

Required:

1.What is the value in use (i.e. present value of estimated cash flows) of the equipment to the nearest dollar for this equipment? Show calculations. You may use your calculator, present value tables (3 marks)

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2. There are three levels of inputs under IFRS 13. At what level (1, 2 or 3) will the type of inputs used by Omega Co. in determining the fair value of the specialized equipment be categorized? Briefly explain why. (2 marks)

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Part B. (5 marks). On January 1, 2020 Lance Co. issued five-year bonds with a face value of $600,000 and a stated interest rate of 10% with interest payable annually on January 1. The bonds were sold (issued) to yield a market rate of 8%. The issue price of the bonds is the sum of the present value of the interest payments and of the face amount at maturity discounted at the market rate. Compute the following:

i. Present value of annual interest payments:________________

ii. Present value of the face amount of $600,000 due in 5 years:

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2. Issue Price of bonds:_______________________