Regis Inc. bought a machine on January 1, 2004 for $400,000. The machine had an expected life of 20 years and was expected to have a salvage value of $40,000. On July 1, 2014, the company reviewed the potential of the machine and determined that its undiscounted future net cash flows totaled $200,000 and its discounted future net cash flows totaled $140,000. If no active market exists for the machine and the company does not plan to dispose of it, what should Regis record as an impairment loss on July 1, 2014?

Question

Quizplus · Accepted Answer

To determine if there is an impairment loss, we compare the carrying value (historical cost less accumulated depreciation) with the recoverable amount (the higher of fair value less cost to sell or value in use). In this case, since there is no active market, we can only use value in use.

The carrying value on July 1, 2014 would be:

Cost = $400,000
Less accumulated depreciation = (10/20 x $400,000) = $200,000
Carrying value = $200,000

The recoverable amount based on the discounted future net cash flows is only $140,000 which is less than the carrying value of $200,000.

So, the impairment loss would be:

Impairment loss = Carrying value - Recoverable amount
Impairment loss = $200,000 - $140,000
Impairment loss = $60,000

However, the impairment loss cannot exceed the carrying value minus the salvage value. In this case, the carrying value is $200,000 and the salvage value is $40,000, so the maximum impairment loss that can be recognized is $160,000. Since $60,000 is less than $160,000, the impairment loss would be recorded as $71,000 (the excess of carrying value over recoverable amount after taking into account the salvage value).

Therefore, the answer is D.

Regis Inc Bought a Machine on January 1, 2004 for $400,000