Question

On July 1, 20X6 S Corp. purchased a storage facility for $5,000,000 and began depreciating it over 20 years to a nil residual value. S Corp. uses the cost model to account for the facility. At the end of 20X8, there is an indication that the facility may be impaired. An appraisal reveals that the fair value of the building has decreased to $4,000,000. Costs to sell are $20,000. A discounted cash flow valuation results in a value in use of $4,300,000. Is the asset is impaired? If so, what is the amount of the impairment loss?

Answer 1

Calculation of Carrying Amount
Cost of the storage facility	5000000
Life of the storage facility	20
Depreciation per year	250000
Depreciation for 3 years	750000
Carrying Amount	4250000
Calculation of Value in Use
Value of discounted cash flows	4300000
Less; Cost of dispossal	20000
Value in use	4280000
Calculation of recoverable value
Value in use	4280000
Fair value of the building	4000000
Recoverable value (which ever is higher)	4280000
Here in our case, recoverable value is more than the carrying amount. Therefore, there is no impairment of asset.