Question

1. Impairment of Finite Lived Assets.  Illumination Inc. owns a factory in Renton, Washington that makes light bulbs.  During 2018, due to increased competition from LED manufacturers, the company determined that an impairment test was appropriate.  Management has prepared the following information for the assets of the factory (In $millions).

                  Cost of Factory Assets                                $680

                  Accumulated Depreciation                        450

                  Net Book Value                                           $230

                  Estimated future undiscounted cash

                  flow from the factory                                $200

                  Fair value of factory assets                       $180

1. Perform the impairment test for these factory assets, clearly labeling your work between Step #1 and Step #2

2. Prepare the journal entry to record the impairment, if one exists.

Answer 1

Answer :

Journal entry :-

Date	General journal	Debit	Credit
31-dec-2018	impairment loss	$30
	Cost of factory		$30
31-dec-2018	P or L	$30
	Impairment loss		$30

Explanation : Impairment testing

Impairment of Assets seeks to ensure that an entity's assets are not carried at more than their recoverable amount (i.e. the higher of fair value less costs of disposal and value in use). With the exception of goodwill and certain intangible assets for which an annual impairment test is required, entities are required to conduct impairment tests where there is an indication of impairment of an asset, and the test may be conducted for a 'cash-generating unit' where an asset does not generate cash inflows that are largely independent of those from other assets.

Impairment loss =Recoverable Value- Carrying Amount

Recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss.

If recoverable amount is more than carrying amount of an asset, then no impairment loss will be recognized.

1)Recoverable amount shall be higher of the following:

i)Fair Value less cost of disposal
ii)Value in use

In detail :

i)Fair Value less cost of disposal is:
Costs of disposal are deducted while determining the fair value less cost of disposal.

ii)Value in use :

It shall be calculated on the following basis:

Estimated Future Cash Flow
Discount rate.

2) carrying amount : it is carrying amount of an asset appearing as on end of year or on the date of impairment.

Calculation of carrying amount :

Cost of asset - accumulated depreciation

= $680 - $450

= $230

Therefore,

Impairment loss =Recoverable Value- Carrying Amount

Step 1

Recoverable amount shall be higher of the following:

i)Fair Value less cost of disposal
ii)Value in use

Given i) fair value = $180

ii) value in use (expected future cash flows) = $200

Therefore, recoverable amount is higher of above i) & ii)

i.e., $ 200

Step 2

Carrying amount as on year end = $ 230

Step 3

Impairment loss = $200 - $230 = $30

Journal entry :

Date	General journal	Debit	Credit
31-dec-2018	impairment loss	$30
	Cost of factory		$30
31-dec-2018	P or L	$30
	Impairment loss		$30