General Optic Corporation operates a manufacturing plant in Arizona. Due to a significant decline in demand for the product manufactured at the Arizona site, an impairment test is deemed appropriate. Management has acquired the following information for the assets at the plant: Cost $ 42,500,000 Accumulated depreciation 15,200,000 Generalâs estimate of the total cash flows to be generated by selling the products manufactured at its Arizona plant, not discounted to present value 17,000,000 The fair value of the Arizona plant is estimated to be $16,000,000.
Required: 1. & 2. Determine the amount of impairment loss. If a loss is indicated, where would it appear in General Opticâs multiple-step income statement?
3. If a loss is indicated, prepare the entry to record the loss.
4. & 5. Determine the amount of impairment loss assuming that the estimated undiscounted sum of future cash flows is $17,000,000 instead of $17,000,000 and $27,950,000 instead of $17,000,000.
General Optic Corporation operates a manufacturing plant in Arizona. Due to a significant decline in demand for the product manufactured at the Arizona site, an impairment test is deemed appropriate. Management has acquired the following information for the assets at the plant: Cost $ 42,500,000 Accumulated depreciation 15,200,000 Generalâs estimate of the total cash flows to be generated by selling the products manufactured at its Arizona plant, not discounted to present value 17,000,000 The fair value of the Arizona plant is estimated to be $16,000,000.
Required: 1. & 2. Determine the amount of impairment loss. If a loss is indicated, where would it appear in General Opticâs multiple-step income statement?
3. If a loss is indicated, prepare the entry to record the loss.
4. & 5. Determine the amount of impairment loss assuming that the estimated undiscounted sum of future cash flows is $17,000,000 instead of $17,000,000 and $27,950,000 instead of $17,000,000.
Related questions
Happy Travel Group (HTG) has a small hotel in Central which was acquired on 1 January 2016 for $18 million. The fair value of the hotelâs net assets on the acquisition date and their carrying amount at the financial year end date are detailed in Table 1:
| Fair value 1 January 2016 $million | Carrying amount 31 December 2016 $million | |
| Land and building | 11.0 | 13.0 |
| Equipment | 2.7 | 2.4 |
| Cash | 4.2 | 3.5 |
| Vehicles | 0.3 | 0.2 |
| Account receivables | 1.0 | 1.5 |
| Account payables | (1.7) | (2.2) |
| 17.5 | 18.4 |
The following facts were discovered before an impairment review on 31 December 2016:
In June 2016, a rival hotel opened another âboutiqueâ hotel 50 meters away from HTGâs hotel. The revenue of HTGâs hotel was seriously affected and on 31 December 2016, the value-in-use of HTGâs hotel was $16 million.
The owner of the rival hotel has offered to buy HTGâs hotel (including all of the above net assets) for $18 million.
An independent surveyor stated the fair value of the land and building should be $12 million.
In Table 1, the carrying amount of the vehicles included a hotel vehicle which had an accident on 31 December 2016. This vehicle was beyond repair after the accident. The carrying amount of that vehicle was $40,000 and the insurance company indicated that it was used by an uninsured purpose and the loss is not covered by insurance.
A corporate client of HTG hotel owing $120,000 went into liquidation on 31 December 2016. HTG estimated that they will receive only 50% of the amount outstanding.
Required:
a Determine the amount of goodwill for HTGâs hotel on 1 January 2016. (2 marks)
b Prepare accounting journal entries to record the impairment loss of the HTG hotel on 31 December 2016. Show your workings. (15 marks)
c Explain why the impairment test of HTGâs hotel requires the use of a cash generating unit, rather than being based on individual assets. (8 marks)
Happy Travel Group (HTG) has a small hotel in Central which was acquired on 1 January 2016 for $18 million. The fair value of the hotelâs net assets on the acquisition date and their carrying amount at the financial year end date are detailed in Table 1:
| Fair value 1 January 2016 $million | Carrying amount 31 December 2016 $million | |
| Land and building | 11.0 | 13.0 |
| Equipment | 2.7 | 2.4 |
| Cash | 4.2 | 3.5 |
| Vehicles | 0.3 | 0.2 |
| Account receivables | 1.0 | 1.5 |
| Account payables | (1.7) | (2.2) |
| 17.5 | 18.4 |
The following facts were discovered before an impairment review on 31 December 2016:
In June 2016, a rival hotel opened another âboutiqueâ hotel 50 meters away from HTGâs hotel. The revenue of HTGâs hotel was seriously affected and on 31 December 2016, the value-in-use of HTGâs hotel was $16 million.
The owner of the rival hotel has offered to buy HTGâs hotel (including all of the above net assets) for $18 million.
An independent surveyor stated the fair value of the land and building should be $12 million.
In Table 1, the carrying amount of the vehicles included a hotel vehicle which had an accident on 31 December 2016. This vehicle was beyond repair after the accident. The carrying amount of that vehicle was $40,000 and the insurance company indicated that it was used by an uninsured purpose and the loss is not covered by insurance.
A corporate client of HTG hotel owing $120,000 went into liquidation on 31 December 2016. HTG estimated that they will receive only 50% of the amount outstanding.
Required:
a Determine the amount of goodwill for HTGâs hotel on 1 January 2016. (2 marks)
b Prepare accounting journal entries to record the impairment loss of the HTG hotel on 31 December 2016. Show your workings. (15 marks)
c Explain why the impairment test of HTGâs hotel requires the use of a cash generating unit, rather than being based on individual assets. (8 marks)
