On May 1, 2013, Silky, Inc., purchased machinery for $350,000; the estimated useful life was eight years and the expected salvage value was $15,000. Straight-line depreciation is used. On May 1, 2015, economic factors cause the market value of the machinery to decrease to $190,000. On this date, Silky evaluates whether the machinery is impaired. a. Assume that on May 1, 2015, Silky estimates future cash flows relating to the use and disposal of the machinery to be $200,000. Is the machinery impaired at May 1, 2015? If it is impaired, what is the amount of the impairment loss? The machinery is not impaired Impairment loss = $ 0 b. Assume that on May 1, 2015, Silky estimates future cash flows relating to the use and disposal of the machinery to be $300,000. Is the machinery impaired at May 1, 2015? If it is impaired, what is the amount of the impairment loss? Impairment loss = $ 0

Lets calculate the carrying Value of machinery first

Depreciation = (Cost of Purchase - Salvage value)/ Life of asset

= (350000-15000)/8

= 41875

A.

Carrying value of asset $ 266250

Expected Cash flow from machinery is $ 200000

Because the amount of estimated future cash flows from the use and disposal of the machinery is less than the carrying value of the machinery, the machinery is impaired.

Impairment loss = carrying value - Fair market value

Carrying value = $266250

Less: Fair market value = $190000

Impairment loss = $76250

Note:-

* Impairment loss is measured as the excess of carrying amount of the asset over its recoverable amount.

* Recoverable amount: “The higher of its fair value less costs to sell and its value in use.”

* Value in use: -Discounted expected future cash flows.

B.

Carrying value of asset $266250

Expected Cash flow from machinery is $ 300000

Because the amount of estimated future cash flows from the use and disposal of the machinery is greater than the carrying value of the machinery, the machinery is not impaired.

Impairment loss will be $0

Lets calculate the carrying Value of machinery first

Depreciation = (Cost of Purchase - Salvage value)/ Life of asset

= (350000-15000)/8

= 41875

A.

Carrying value of asset $ 266250

Expected Cash flow from machinery is $ 200000

Because the amount of estimated future cash flows from the use and disposal of the machinery is less than the carrying value of the machinery, the machinery is impaired.

Impairment loss = carrying value - Fair market value

Carrying value = $266250

Less: Fair market value = $190000

Impairment loss = $76250

Note:-

* Impairment loss is measured as the excess of carrying amount of the asset over its recoverable amount.

* Recoverable amount: “The higher of its fair value less costs to sell and its value in use.”

* Value in use: -Discounted expected future cash flows.

B.

Carrying value of asset $266250

Expected Cash flow from machinery is $ 300000

Because the amount of estimated future cash flows from the use and disposal of the machinery is greater than the carrying value of the machinery, the machinery is not impaired.

Impairment loss will be $0