Question

On January 1, 2015 FranchisingRUs purchased a Souper Duper restaurant franchise for $10 million

which allows FranchisingRUs to operate a Souper Duper restaurant for 10 years, and recorded the

franchise fee as an intangible asset. FranchisingRUs anticipates annual cash flows on the restaurant of

$2.4 million and will amortize the franchise fee using the straight-line method (the franchise has no

value at the end of the 10 year term). In 2020 the coronavirus hit. FranchisingRUs attempted to keep

the restaurant open for carry out meals during the outbreak, but in the end decided that its best option

would be to close the restaurant for the duration of the outbreak. It estimates that cash flows in 2020

will be $1 million less than its overall annual estimate, but believes that cash flows in the remaining

years of the franchise agreement (2021 through 2024) will be at the level estimated at the start of the

franchise agreement.

Does the situation described above suggest that FranchisingRUs would need to consider recording an

impairment loss on the Souper Duper franchise? Why or Why not?

Answer 1

Life Span (years)	10
Cost of acquistion (million)	$10
Depreciation per year - 10/10	$1
Depreciation amount for 5yrs (million)	$5
Carrying Cost (million)	$5
Present Value of cash flow (million) 2.4-1	$1
Impairment Loss (Carrying cost - Present value of cash flow)	$4

Writing off an impairment loss along with other common deductions helps reduce the amount of taxes your company has to pay. So you should keep track of all of your company’s assets, the amount you paid for them, and the value of them on an annual basis. Yes, impairment loss needs to be recorded.