Reference no: EM132271832 , Length: 1 page
Problem 1:
Asset impairment
Four years ago Omega Technology, Inc., acquired a machine for use in its computer chip manufacturing operations at a cost of $35,000,000. The firm expected the machine to have a seven-year useful life and a zero salvage value. The company has been using straight-line depreciation for the asset. Due to the rapid rate of technological change in the industry, at the end of Year 4, Omega estimates that the machine is capable of generating (undiscounted) future cash flows of $11,000,000. Based on the quoted market prices of similar assets, Omega estimates the machine to have a fair market value of $9,500,000.
Required:
1. What is the book value of the machine at the end of Year 4?
2. Should Omega recognize an impairment of this asset? Why or why not? If yes, what is the amount of the impairment loss that should be recognized?
3. At the end of Year 4, at what amount should the machine appear in Omega's balance sheet?
Problem 2:
Lower of Cost or Market
Moore Corporation has two products in its ending inventory; each is accounted for at the lower of cost or market. A profit margin of 30% on selling price is considered normal for each product. Specific data with respect to each product follows:
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Product 1
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Product 2
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Historical cost
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$17.00
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$ 45.00
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Replacement cost
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15.00
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46.00
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Estimated cost to dispose
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5.00
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26.00
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Estimated selling price
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30.00
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100.00
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Required:
In pricing its ending inventory using the lower of cost or market rule, what unit values should Moore use for products 1 and 2, respectively?
Problem 3:
Four years ago Alpha Products, Inc. acquired a computer-controlled milling machine to use in its medical device manufacturing operations at a cost of $5,000,000. The firm expected the machine to have an eight-year useful life and zero salvage value. The company has been using straight-line depreciation for the asset. Due to the rapid rate of technological change in the industry, at the end of Year 5, Alpha estimates that the machine is capable of generating (undiscounted) future cash flows of $1,500,000. Based on the quoted market prices of similar assets, Alpha estimates the machine to have a fair value of $1,200,000.
Please discuss the following statements/questions and reply to at least one other student.
a. What is the book value of the machine at the end of Year 5?
b. Should Alpha recognize an impairment of this asset? Why or why not? If yes, what is the amount of the impairment loss that should be recognized?
c. At the end of Year 5, at what amount should the machine appear in Alpha's balance sheet?
d. What would your answer to requirement (b.) have been if Alpha's estimate of the machine's (undiscounted) future cash flows was $2,000,000?
Note: Solve only the last problem questions a-d