Question

Sanjo Company owns a trade name that was purchased in an acquisition of McClellan Company. The trade name has a book value of $1,820,000, but according to GAAP, it must be assessed for impairment on an annual. To perform this impairment test, Sanjo must estimate the fair value of the trade name. It has developed the following cash flow estimates related to the trade name based on internal information. Each cash flow estimate reflects Sanjo's estimate of annual cash flows over the next 7 years. The equipment is assumed to have no residual value, and cash flows occur at the end of each year. Sanjo determines that the appropriate discount rate for these cash flows is 9%.

Estimate the value in use of the equipment.

Use a financial calculator to estimate the value in use of the equipment.

year	cash-flow Estimate
1-3	$                        220,000
4-6	$                        340,000
7	$                        400,000

Answer 1

Impairment loss = Carrying amt. - Recoverable amt.

Where, Impairment loss is reduction in the value of assets.

Carrying Amt. is the book value of assets after charging depreciation and revaluation if any.

Recoverable Amt. higher of (i) Net selling price or (ii) value in use

Net selling price = Estimated selling price - estimated selling expenses

Value in use is value of expected cash flows arising from use of asset including terminal value. Such cash flows should be discounted using pre tax discount rate.

Estimation of the value in use -

Year Cash flow Discounting $1@9% PV 11 220000 0.9174 201834.9 2 220000 0.8417| 185169.6 3 220000 0.7722 169880.4 2 3 4 340000 5 340000 0.7084 240864.6 0.6499 220976.7 0.5963 202730.9 0.5470 218813.7 6 340000 7 400000 Total 1440271

Impairment loss = 1820000 - 1440271

= $ 379729.3

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