Cupcakes- R- Us, Inc. is reviewing all available information regarding the future use of its baking equipment, which it intends to use for the foreseeable future. The company has observed a decline in the demand for its products. The information also indicates that this equipment may be obsolete and could be impaired. Cupcakes- R- Us acquired the equipment two years ago at a cost of $ 500,000 and depreciated it using the straight- line method with an estimated residual value of $ 10,000 and a seven- year useful life. At the end of the second year, management estimates the following cash flows from the use of the asset:

Required
a. Compute the carrying value of Cupcakes- R- Us€™s equipment.
b. Compute the present value of expected cash flows under Estimate 1 and Estimate 2. Assume the cost of capital is 8%. For each estimate, is the present value of estimated future cash flows higher or lower than the equipment€™s carrying value?
c. Conduct the impairment tests for Cupcakes- R- Us under Estimate 1 and Estimate 2. If required, prepare the journal entry to record any impairment loss.

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Cash Flow Cash Flow Projection Projection- Estimate 2 Future Period Year 1 Year 2 Year 3 Year 4 Year 5 Total Estimate 1 $120,000 100,000 70,000 35,000 30,000 355,000 $120,000 100,000 80,000 35,000 30,000 $365,000