Question

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

ii.List two models that the company could consider to fair value the asset at the end

of each year (2 marks)

iii.Calculate the fair value on Dec 31^st,2018 using the traditional approach

iv.Calculate

the fair value on Dec 31^st,

2018 using the expected cash flow approach

v.Under either approach explain if there is an impairment and why or why not.

vi.Which approach would you recommend that the company use and why?