A company prepares its financial statements in acc
A company prepares its financial statements in accordance with U.S.GAAP (generally accepted accounting principles).It expected to be the sole supplier for a state-wide school milk program and had production facilities valued at $28.4 million.Recently several other companies were also granted milk-supply contracts throughout the state and the company now estimates that it will only be able to generate cash flows of $3 million per year for the next 7 years with its facilities.The firm has a cost of capital of 10%.
The impairment loss (in $-millions) on the production facilities will most likely be reported in the company’s financial statements as a:
A.13.8 reduction in operating cash flows..
B.13.8 impairment loss in the income statement
C.7.4 reduction in the balance sheet carrying amount.
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2024-10-11 02:29:01
Ans:B.
The company will report an impairment loss in the income statement:
The facilities fail the recoverability test, the net book value cannot be recovered from undiscounted cash flows: 7 yrs x $3 = $21 < $ 28. 4.Therefore, the asset is impaired.The asset should be written down to its fair value.
Fair Value: PV of future benefits: (N=7; i=10; PMT=3): PV =14.6
Impairment Loss: Carrying Value – Fair Value:28.4 -14.6 = 13.8 to be reported on the income statement.
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