Question 1 (17 marks)

Ruby Corporation is in the printing billboard business. The company's shares trade on the TSX. In 2018 the company purchased specialized equipment for $250,000. The market value of the equipment at the time of the acquisition was $265,000. Due to the large capital investments that need to be made in specialized equipment Ruby Corporation doesn't have many competitors.

Management expects that the equipment will produce the following cash flows: $50,000 for the next 7 years, with a 20% chance that it could be $40,000 each year. Management expects that the residual value will be $20,000 in 7 years.

The risk adjusted rate is 6% and the risk free rate is 4%.

The carrying value of the equipment on December 31^st, 2018 is $219,000.

At the end of each year the company needs to test the equipment value to determine if there is an impairment.

i.Provide two measurement alternatives on how the controller of the company can value the asset on the date of acquisition. Explain what the benefit to using each measurement alternative is. Be sure to support your answer using the qualitative characteristics and explain why. You may also want to refer to a GAAP principle if applicable. (6 marks)

Measurement Alternatives

Support using a qualitative characteristic