Question

On January 1, 2016, Travis Company purchased machinery costing $3,000,000. The company uses straight-line depreciation assuming the machinery's useful life to be 10 years and its residual value to be $600,000.

At the end of 2019, the company felt that technological advances had caused an impairment of its machinery and that the remaining useful life of the machinery was only four years. The company estimates the machinery will generate cash inflows of $850,000 and cash outflows of $100,000 over each of the next four years. The company uses a 15% rate of return to evaluate capital budgeting projects.

Required:

• Determine if an impairment loss has occurred. (Show all calculations).
• Calculate the amount of any impairment loss to be recognized. The present value of an annuity is 2.85498;present value of $1 is 0.57175; and future value of annuity is 4.99338.

Answer 1

a Calculation of an impairment loss has occurred Answer $3,000,000 Original Cost of Machine Less: Accumulated Depreciation $960,000 ($3,000,000- $600,000)/ 10 yrs x 4 yrs] $2,040,000 Book Value at the end of 2019 $1,600,000 Undiscounted Expected Net Cash Flows ($400,000 x 4 yrs) $440,000 Impairment Loss has Occurred Note: Cash flow is less than the book value of machine as at end of 2019, so impairment loss occurred would be the difference of book Value of Machine and Undiscounted Expected Net Cash Flows. b Calculation of amount of any impairment loss to be recognized Present Value of Expected Net Cash Flow ($400,000 x 2.85498) $1,141,992 $2,040,000 ($898,008 Book Value at the end of 2019 Impairment Loss to be recognized