Cost recovery impairment model Green Air Inc. purchased a non-renewable licensing agreement for access to proprietary...

 

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Cost recovery impairment model Green Air Inc. purchased a non-renewable licensing agreement for access to proprietary technology that allows it to produce bio-char from organic waste. When the 10-year licensing agreement was purchased 6 years ago there were no other companies operating in the space. However, numerous competitors have emerged in the industry as direct competitors to Green Air Inc. As a result of recent market entrants, the market demand for its bio-char products has been steadily declining. The company has the following information available related to the licensing agreement: Licensing agreement at Cost...............$125,000 Estimated Useful Life............ Salvage Value......... 10 years $ 0 Green Air Inc. is currently testing this asset for impairment. While the licensing agreement could currently be sold for $40,000, Green Air Inc. plans to keep producing the bio-char two more years. It expects net cash flows from production to be $20,000 yearly and that it can sell the licensing agreement for $7,500 at the end of year two. The current interest rate is 5%. Instructions a) Assume that Green Air Inc. follows ASPE and uses the cost recovery impairment model. Is there an impairment loss? Explain why or why not? b) What is the value of the impairment loss? 2 Cost recovery impairment model Green Air Inc. purchased a non-renewable licensing agreement for access to proprietary technology that allows it to produce bio-char from organic waste. When the 10-year licensing agreement was purchased 6 years ago there were no other companies operating in the space. However, numerous competitors have emerged in the industry as direct competitors to Green Air Inc. As a result of recent market entrants, the market demand for its bio-char products has been steadily declining. The company has the following information available related to the licensing agreement: Licensing agreement at Cost...............$125,000 Estimated Useful Life............ Salvage Value......... 10 years $ 0 Green Air Inc. is currently testing this asset for impairment. While the licensing agreement could currently be sold for $40,000, Green Air Inc. plans to keep producing the bio-char two more years. It expects net cash flows from production to be $20,000 yearly and that it can sell the licensing agreement for $7,500 at the end of year two. The current interest rate is 5%. Instructions a) Assume that Green Air Inc. follows ASPE and uses the cost recovery impairment model. Is there an impairment loss? Explain why or why not? b) What is the value of the impairment loss? 2

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a No there is not an impairment loss The cost recovery impairment model requires that ... View the full answer