Galloway Realty Company owns a number of large office buildings in several cities in the United States. One of the buildings is 16 years old and has had a large number of vacant office suites for several years. The building's book value is $13.2 million. The company has examined carefully its future cash flows and has determined that it is highly unlikely that the company can recover the building's book value from future cash flows. Further study in November 2016 has resulted in three estimates of the market value of the building. All of the estimates of value are approximately $8.3 million.
INSTRUCTIONS
1. Should Galloway record impairment of the building? Why?
2. If impairment should be recorded, what is the amount of impairment?
3. What accounting entry would be necessary based on the above facts?
4. If impairment is recorded in 2016 and subsequently the value of the building increases in 2017 so that the market value exceeds the book value, should the book value of the building be increased at that time?
Analyze: How could the company use its estimates of cash flows to arrive at a "market value" of the building?