505 Words3 Pages

LP 1.2 Case Study
Accounting
A) Determine the amount of impairment loss, if any, that Electroboy should report for fiscal 2011 and the book value at which Electroboy should report the 5 stores on its fiscal year-end 2011 balance sheet. Assume that the cash flows occur at the end of each year.
The impairment loss value that should be reported for the 5 stores at the end of fiscal 2011 is $17,200,000.
Carrying amount – 36 million – (4x10million) = -4,000,000 – Book value
Undiscounted expected cash flow = 4 x 4.0 million = 16,000,000 for all the years.
Fair value = 4.0 million x 3.3 = 13,200,000 P = A/ (1+nr) =4 million / (1 + 4 x .05) = 4 million / 1.2 = 3.3
Impairment value = fair value minus book value = 13,200,000 - -4,000,000 = 17,200,000
B) Repeat part A but instead assume that (1) the estimated remaining useful life is 10 years, (2) the estimated annual cash flows $2,720,000 per year, and (3) the appropriate discount rate is 6%.
The impairment loss value that should be reported for the five stores at the end of fiscal 2011 is $4,624,064,000,000
Carrying amount = 36 million – (10 x 10 million) = (-64 million) - book value
Undiscounted expected cash flow = 10 x 2,720,000 = 27,200,000 for all years.
Fair value = 2,720,000 x 1,700,000 = 4,624,000,000,000 P= A / (1 + nr) =2,720,000 / (1 + 10 x .06) = 2,720,000 / 1.6 = 1,700,000
Impairment value = fair value – book value = 4,624,000,000,000 - -64 million = 4,624,064,000,000
Analysis
Assume that you are a financial analyst and you participate in a conference call with Electroboy management in early 2012 (before Electroboy closes the books on fiscal 2011). During the conference call, you learn that management is considering selling the five stores, but the sale won’t likely be completed until the second quarter of fiscal 2012.

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