Henry Co.manufactures DVD players.At the end of Year 1,Henry's management believes the growing popularity of streaming video content will reduce the demand for Henry's DVD players.The DVD players are manufactured using specialized equipment with a historical cost of $3,000,000 and accumulated depreciation of $1,520,000.The managers estimate the equipment has a remaining useful life of 4 years and will generate the following undiscounted cash flows: $$\begin{array} { l r }
\text { Year 2 } & \$ 540,000 \
\text { Year 3 } & 420,000 \
\text { Year 4 } & 190,000 \
\text { Year 5 } & 125,000 \
\text { Salvage value } & 50,000
\end{array}$$
If the equipment were sold today,the sales price would be $1,600,000.Is the equipment considered impaired,why or why not?

Question

Henry Co.manufactures DVD players.At the end of Year 1,Henry's management believes the growing popularity of streaming video content will reduce the demand for Henry's DVD players.The DVD players are manufactured using specialized equipment with a historical cost of $3,000,000 and accumulated depreciation of $1,520,000.The managers estimate the equipment has a remaining useful life of 4 years and will generate the following undiscounted cash flows: $$\begin{array} { l r } 
\text { Year 2 } & \$ 540,000 \
\text { Year 3 } & 420,000 \
\text { Year 4 } & 190,000 \
\text { Year 5 } & 125,000 \
\text { Salvage value } & 50,000
\end{array}$$
If the equipment were sold today,the sales price would be $1,600,000.Is the equipment considered impaired,why or why not?

Quizplus · Accepted Answer

The equipment is considered impaired because the total undiscounted cash flows ($540,000 + $420,000 + $190,000 + $125,000 + $50,000 = $1,325,000) are less than the carrying amount of the asset ($3,000,000 - $1,520,000 = $1,480,000). The difference is $155,000 ($1,480,000 - $1,325,000), indicating impairment.

Henry CoManufactures DVD Players If the Equipment Were Sold Today,the Sales Price Would Be