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On January 1, 2015, Pearl Ltd. purchased equipment for $696,000. The equipment was assumed to have an 8-year useful life and no residual value, and was to be depreciated using the straight-line method. On January 1, 2017, Pearl's management became concerned that the equipment may have become obsolete. Management calculated that the undiscounted future net cash flows from the equipment was $500,250, the discounted future net cash flows was $443,700, and the current fair value of the equipment (after costs to sell) was $435,000.

a) Assuming that Pearl is a private Canadian company following ASPE, identify which model should be used to test for impairment.

b) Record the journal entry to record the impairment loss, if any.

c) Assuming that Pearl is a public Canadian company, identify which model should be used to test for impairment.

d) Record the journal entry to record the impairment loss, if any.

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Jarrod Robel
Jarrod RobelLv2
28 Sep 2019

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The management of Petro Garcia Inc. was discussing whethercertain equipment should be written off as a charge to currentoperations because of obsolescence. This equipment has a cost of$900,000 with depreciation to date of $400,000 as of December 31,2014. On December 31, 2014, management projected its future netcash flows from this equipment to be $300,000 and its fair value tobe $230,000. The company intends to use this equipment in thefuture.

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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 General’s 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.

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Problem 1

You have determined that one asset and one CGU should be testedfor impairment at December 31, 20x2.

Details on these are as follows:

Asset Carrying value $2,800,000

Fair value 2,200,000

Costs to sell are expected to be equal to 7% of fair value

The asset’s useful life is 10 years and is expected to generatecash flows of $350,000 per year.

CGU

Carrying value

Land $ 800,000

Building 2,500,000

Equipment 1,300,000

Goodwill 950,000

Total $5,550,000

Fair values

Land (costs to sell = 8% of fair value) $1,200,000

Building (costs to sell = 10% of fair value) 2,700,000

Equipment (costs to sell = 25% of fair value) 800,000

The remaining useful life of the building and equipment is 16years. The cash flows generated by the CGU are expected to be$360,000 per year.

Required –

Calculate the impairment loss, if any, assuming that the entityis subject to:

a. IFRS. If there is an impairment loss for the CGU, allocatethe impairment loss to the CGU’s assets.

b. ASPE

A discount rate of 6% should be used.

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