El Dorado Foods Inc. owns a chain of specialty stores in the Pacific Northwest. Recently, four of the stores have experienced declining profits due to market saturation in the area. As a result, management gathered data about possible impairment of the assets of the stores. The information gathered was as follows: Book value: $17.20 million Fair value (Present value of future cash flows) : $14.84 million Undiscounted sum of future cash flows: $16.20 million

Required:

Determine the amount, if any, of the impairment loss that El Dorado must recognize on these assets.

Question

Business

Steven Woods

25 November, 10:18

El Dorado Foods Inc. owns a chain of specialty stores in the Pacific Northwest. Recently, four of the stores have experienced declining profits due to market saturation in the area. As a result, management gathered data about possible impairment of the assets of the stores. The information gathered was as follows: Book value: $17.20 million Fair value (Present value of future cash flows) : $14.84 million Undiscounted sum of future cash flows: $16.20 million

Required:

Determine the amount, if any, of the impairment loss that El Dorado must recognize on these assets.

+5

Answers (1)

Know the Answer?

Pace · Answer 1

Impairment loss of $2,360,000 must be recognized on these assets

Explanation:

Impairment occurs when the Carrying Amount of Asset exceeds the Recoverable Value.

Carrying Amount of Asset

Carrying Amount of Asset = Book value = $17,200,000

Recoverable Value of An Asset

Recoverable Value is the Higher of:

Value in Use of Asset and, Fair Value Less Cost to sell

Only the Value in use are provided.

Consider the Present value of future cash flows of $14,840,000

Impairment Analysis

Carrying Amount of Asset $17,200,000 > Recoverable Value $14,840,000

Therefore the Asset is impaired

Impairment loss is $17,200,000 - $14,840,000 = $2,360,000