Reference no: EM132794955

On January 1, 2018, in the hopes of developing a new customer base, Reckless Retailer purchased the catalog mailing list of Larry & David's Fruit Co. The mailing list contained the addresses of 25,000 of Larry & David's best customers.

• Reckless Retailer paid Larry & David $ 500,000 for the list. According to the sales contract, Reckless may use the mailing list for five years but must stop at that point in time. Accordingly, Reckless will amortize the asset over that time period.
• Each year, Reckless will send catalogs to every customer on the list. The total cost (which includes printing and mailing) of the catalogs is $ 10 per address per year.
• During 2018 and 2019, the catalog mailings resulted in 4,000 orders each year. The average "sales" for each order was $ 130, and the average "cost of sales" for each order was $ 50. These results are expected to remain constant as long as Reckless sends out catalogs.
• Because the results of the catalog mailings were not quite as favorable as originally expected, Reckless Retailer decided to test the "Mailing List" asset for impairment on December 31, 2019.
• When applicable, any cash flows should be discounted at a rate of 15% per year.

Various present value factors for 15% are as follows:

                                                             N =1              N = 2              N = 3             N = 4                     N = 5

Present Value Factor                       0.870          0.756             0.658            0.572                0.497

Present Value Annuity Factor            0.870            1.626              2.283          2.855               3.352

Problem 1: A. Is the "Mailing List" purchased by Reckless Retailer "impaired" as of December 31, 2019? Why or why not?

Problem 2:  If your answer to Part A was that the "Mailing List" is considered "Impaired", at what amount should the "Mailing List" be reported on Dec. 31, 2019 Balance Sheet after considering the Impairment?

Problem 3: If your answer to Part A was that the "Mailing List" was not impaired on 12/31/19, what is the minimum number of expected orders that must be received each year such that the list would not consider being impaired? (Assume that for each of 2020, 2021, and 2022, Reckless continues to send catalogs to all 25,000 addresses, and that the number of orders, average sales per order, and the the average cost of sales will remain constant in the future.)