Wong Company owns specialized equipment that was purchased in an acquisition of Liu Company. The equipment has a book value of $1,500,000. To perform an impairment test, according to IFRS, Wong must estimate the fair value of the equipment and has developed the following annual cash flow estimates related to the equipment based on internal information for the next 5 years. The equipment is assumed to have no residual value after the 5 years. Assume that the cash flows occur at the end of each year and the appropriate discount rate is 6%.

Year Cash Flow Estimate

13 $240,000

45 365,000

Required:

1. To the nearest dollar, what is the estimated fair value of the equipment (present value of expected cash flows)? (3 marks)

__________________________________________________________________________

2. Assuming that selling costs are negligible and that the fair value of the equipment computed above is its recoverable amount, is the equipment considered impaired and if so, what is the impairment loss? (2 marks)

____________________________________________________________________

____________________________________________________________________________

3. There are three levels of inputs under IFRS 13. What type of inputs are used by Wong Company in the above acquisition of specialized equipment from Liu Company? As a result, what classification would be assigned to the specialized equipment? (2 marks)

__________________________________________________________________________

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Part B. (3 marks).

Singh Inc. is considering leasing a piece of equipment with a fair value of $108,000 for three years. The current market interest rate for financing the equipment is 8%. Calculate the annual lease payment assuming that the payment is made at the end of the period (round to the nearest dollar).

Annual lease payment:____________________________________________

Table 1

Present Value of 1

Periods 2% 3% 4% 6% 8%

1 0.98039 0.97087 0.96154 0.94340 0.92593

2 0.96117 0.94260 0.92456 0.89000 0.85734

3 0.94232 0.91514 0.88900 0.83962 0.79383

4 0.92385 0.88849 0.85480 0.79209 0.73503

5 0.90573 0.86261 0.82193 0.74726 0.68058

Table 2

Present Value of Ordinary Annuity of 1

Periodic Rents 2% 3% 4% 6% 8%

1 0.98039 0.97087 0.96154 0.94340 0.92593

2 1.94156 1.91347 1.88609 1.83339 1.78326

3 2.88388 2.82861 2.77509 2.67301 2.57710

4 3.80773 3.71710 3.62990 3.46511 3.31213

5 4.71346 4.57971 4.45182 4.21236 3.99271