Reegan Company owns a trade name that was purchased in an acquisition of Hamilton Company. The trade name has a book value of €5,250,000, but according to GAAP, it is assessed for impairment on an annual basis. To perform this impairment test, Reegan must estimate the fair value of the trade name. It has developed the following cash flow estimates related to the trade name based on internal information. Each cash flow estimate reflects Reegan's estimate of annual cash flows over the next 7 years. The trade name is assumed to have no residual value after the 7 years. (Assume the cash flows occur at the end of each year.)

Question

Quizplus · Accepted Answer

The fair value estimate for the trade name is the present value of the expected cash flows for the next 7 years. Using a discount rate of 10%, the present value of the cash flows is €5,685,654, which is greater than the book value of €5,250,000. Therefore, no impairment is necessary and the fair value of the trade name is €5,685,654.

Reegan Company Owns a Trade Name That Was Purchased in an Acquisition