P12-3. Tangible Asset Impairment. Using the same information from P12-2, assume that Cupcakes-R-Us determines that the likelihood of the expected future cash flows under Estimate 1 is 70% and 30% under Estimate 2.

Required

Compute the carrying value of Cupcakes-R-Uss equipment.

Compute the expected cash flows given the likelihood of Estimate 1 and Estimate 2. What is the present value of the expected cash flows?

P12-2. Tangible Asset Impairment. 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:Conduct the impairment tests for Cupcakes-R-Us using the results from part b. If required, prepare the journal entry to record any impairment loss.

Required

Compute the carrying value of Cupcakes-R-Uss equipment.

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 equipments carrying value?

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.

a.

Cost
Salvage Value
Depreciable Cost
Divided by Useful Life
Depreciation Expense per Year
Years Depreciated
Accumulated Depreciation
Carry Value

b.

	Cash Flow Projection Estimate 1	Estimate 1 x 70%	Cash Flow Projection Estimate 2	Estimate 2 x 30%	Sum
		(a)		(b)	(a) + (b)
Year 1
Year 2
Year 3
Year 4
Year 5
Total

The carrying value is $ and undiscounted future cash flows are $. Since the carrying value exceeds the undiscounted future cash flows, the asset is impaired.

The present value of expected future cash flows of $ is lower than the equipments carrying value.

Future Period	Cash Flow Projection Estimate 2	Present Value Function at 8% using Spreadsheet Formula	Present Value
Year 1
Year 2
Year 3
Year 4
Year 5
Total

c. Because the sum of the expected equipments undiscounted cash flows of $from part b. is less than the equipments carrying value of $ under Step 1 of the impairment testing, we move to Step 2. Under step, we determine that the impairment loss should be ($ carrying value less $ present value).

The journal entry to record the impairment loss is presented below:

Account	Date of Impairment
Impairment Loss on Equipment
Accumulated DepreciationBaking Equipment
Baking Equipment (Cost Fair Value = $ $)