Question

A company has the following three assets with the information provided: ($ in millions)

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textAsset & textEquipment & textLand & textBuilding
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textBook Value & $8 & $20 & $12
textEstimated Total Future Cash Flows & $6 & $35 & $14
textFair Value & $5 & $30 & $10
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Determine the amount of the impairment loss, if any.
a) $0
b) $10 million
c) $3 million
d) $5 million

Answer 1

After comparing the book value to the higher of the fair value or estimated future cash flows for equipment, land, and building, there is no impairment loss for any asset as the book value does not exceed the higher value in any case.

Step-by-step explanation:

To determine the amount of impairment loss, if any, we compare the book value of the assets to the higher of the fair value or the estimated total future cash flows for each asset. An impairment loss occurs when the book value exceeds either of these values.

• Equipment: Book Value = $8 million, Fair Value = $5 million, Estimated Future Cash Flows = $6 million. We use the higher of Fair Value or Estimated Future Cash Flows ($6 million) and compare it to the Book Value, no impairment loss as $8 million is not greater than $6 million.
• Land: Book Value = $20 million, Fair Value = $30 million, Estimated Future Cash Flows = $35 million. We use the higher of Fair Value or Estimated Future Cash Flows ($35 million) and compare it to the Book Value, no impairment loss as $20 million is not greater than $35 million.
• Building: Book Value = $12 million, Fair Value = $10 million, Estimated Future Cash Flows = $14 million. We use the higher of Fair Value or Estimated Future Cash Flows ($14 million) and compare it to the Book Value. There is an impairment loss because $12 million is less than $14 million.

Therefore, there is no impairment loss for any of the assets since the Book Value does not exceed the higher of the Fair Value or Estimated Future Cash Flows for any asset.