Question

Chadwick Enterprises, Inc., operates several restaurants throughout the Midwest. Three of its restaurants located in the center of a large urban area have experienced declining profits due to declining population. The company’s management has decided to test the assets of the restaurants for possible impairment. The relevant information for these assets is presented below.

Book value	$	7.5	million
Estimated undiscounted sum of future cash flows		4.5	million
Fair value		4.0	million

Required:

1.	Determine the amount of the impairment loss. (Enter your answer in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)

      

2.	Determine the amount of the impairment loss assuming that the estimated undiscounted sum of future cash flows is $7.8 million and fair value is $5.5 million.

Answer 1

1. As the book value is greater than the cash flow, so the amount of the impairment loss= book value - fair value

= $7.5 million - $4 million = $3.5 million

2. There is no amount of the impairment loss as the estimated undiscounted sum of future cash flows is $7.8 million is greater than the book value .