Question

Presented below is information related to equipment owned by AL-Salam Healthy Life Food Company at December 31, 2019.

Cost $4,500,000

Accumulated depreciation 1,900,000

Expected future net cash flows 2,200,000

Fair value 2,080,000

Assume AL-Salam intends to continue to use this equipment in the future.

The amount of impairment loss is

Select one:

a. $ 400,000

b. $ 0

c. $ 120,000

d. $ 520,000

Answer 1

Step I: Carrying value

• Carrying value = Cost - Accumulated depreciation = $4,500,000 - $1,900,000 = $2,600,000

Step II: Recoverable amount

• It is the higher of -
  • Value in use
  • Fair market value
• Value in use: It is the present value of future cash flow generated from the asset. The cost of disposal is reduced from the cash flows. Sales value at the end of the useful life is added to the cash flows.
  • Value in use = $2,200,000
• Fair market value: Amount at which the asset could be sold today less any costs incurred to sell the asset.
  • Fair market value = $2,080,000
• Value in use, being the higher is the Recoverable amount.

Step III: Impairment

• Impairment loss = (Carrying value) - (Recoverable amount) = $2,600,000 -  $2,200,000 = $400,000