In 2016, Cilla Company acquired production machinery at a cost of

In 2016, Cilla Company acquired production machinery at a cost of

$418,000?,

which now has accumulated depreciation of

$250,000.

The sum of undiscounted future cash flows from use of the machinery is

$195,000

and its fair value is

$148,000.

What amount should Cilla recognize as a loss on? impairment?

The Correct Answer and Explanation is :

Cilla Company should recognize a loss on impairment of $70,000.

Here’s a detailed explanation:

When determining whether an asset is impaired under the Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), a company must first assess whether the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is defined as the higher of the asset’s fair value (less selling costs) and the sum of the undiscounted future cash flows expected to be generated from the asset.

Step 1: Compare the carrying value of the asset with its recoverable amount.

• Carrying Value: The carrying value of the machinery is the cost of the asset minus accumulated depreciation:
  [
  \text{Carrying value} = 418,000 – 250,000 = 168,000
  ]
• Recoverable Amount: The recoverable amount is the higher of two values:

1. The sum of the undiscounted future cash flows, which is $195,000.
2. The fair value of the asset, which is $148,000.

Since the sum of the undiscounted future cash flows ($195,000) is higher than the fair value ($148,000), we will use the sum of the future cash flows as the recoverable amount.

Step 2: Compare carrying value with recoverable amount.

• The carrying value of the asset is $168,000.
• The recoverable amount is $195,000.

Since the carrying value ($168,000) is less than the recoverable amount ($195,000), there is no impairment based on the recoverable amount being higher than the carrying value.

However, the impairment is determined by comparing the carrying value to the fair value because the asset’s recoverable amount, in this case, is the sum of future cash flows. Given that the fair value ($148,000) is less than the carrying value ($168,000), an impairment loss must be recognized.

Step 3: Recognize the impairment loss.

The impairment loss is the difference between the carrying value and the fair value:
[
\text{Impairment loss} = 168,000 – 148,000 = 70,000
]

Therefore, Cilla Company should recognize a loss on impairment of $70,000.