Question

Blossom Company owns a trade name that was purchased in an acquisition of McClellan Company. The...

Blossom Company owns a trade name that was purchased in an acquisition of McClellan Company. The trade name has a book value of $ 3,500,000, but according to GAAP, it is assessed for impairment on an annual basis. To perform this impairment test,Blossom must estimate the fair value of the trade name. It has developed the following cash flow estimates related to the trade name based on internal information. Each cash flow estimate reflects Blossom’s estimate of annual cash flows over the next 11 years. The trade name is assumed to have no salvage value after the  11 years. (Assume the cash flows occur at the end of each year.)

Cash Flow Estimate

Probability Assessment
$ 378,900 20%
649,400 50%
758,000 30%


(a) What is the estimated fair value of the trade name? Blossom determines that the appropriate discount rate for this estimation is  11%.

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Answer #1

A)Estimated cash flow = [378900 *.20] + [649400*.50]+[758000*.30]

             = 75780+ 324700+ 227400

             = 627880

Estimated fair value of the trade name = PVA 11%, 11 * Estimated cash flow

            = 6.20652*627880

            = $ 3,896,949.78    [rounded to 3,896,950]

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