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Sun Bowl Inc. owns equipment for which it paid $170 million. At the end of 2018,...

Sun Bowl Inc. owns equipment for which it paid $170 million. At the end of 2018, it had accumulated depreciation on the equipment of $115 million. Due to adverse economic conditions, Sun Bowl’s management determined that it should assess whether an impairment loss should be recognized for the equipment. The estimated undiscounted future cash flows to be provided by the equipment total $151 million, and the equipment's fair value is $135 million. Under these circumstances, Sun Bowl:

A. Would record no impairment loss on the equipment.

B. Would record a $4 million impairment loss on the equipment.

C. Would record a $20 million impairment loss on the equipment.

D. Would record a $35 million impairment loss on the equipment.

E. None of these answers is correct.

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Answer #1

Answer

A. Would record no impairment loss on the equipment.

Explanation:

Equipment Recoverable amount = Higher of equipment's fair value and estimated undiscounted future cash flows

= Higher of $ 151 million and $ 135 million

= $ 151 million

Impairment loss = carrying amount - Recoverable amount

= ( $ 170 - $ 115) - $ 151

= - $ 96 million

As the answer is negative, no impairment is to be done.

In case of any doubt, please comment.

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