Recall Frankie's Homemade Cheese Shop from the Chapter 7 cases. Assume now that Frankie's has finished construction of the new cheese superstore along Route 5 and capitalized $1.9 million related to the project as of the store's opening on 1/1/20X1. As of 12/31/X1, the current carrying value of the shop is $1.805 million (assuming a 20-year life for the store and straight-line depreciation). As of 12/31/X1, Frankie's notices that a few negative factors are at play and asks you whether it is required to test the superstore for impairment: 

1. A key stock market index (the Dow) has slid 1,500 points, or 6%, since the store was opened?

2. Monthly sales have slid by 10% since the store was opened, partially due to a construction project on Route 5 that has reduced traffic flow to the area?

3. As a result of the slide in monthly sales, the store operated at a deficit in October, November, and December of 20X1?

Assume the fair value of the store at 12/31/X1 is $1.7 million. As of 12/31/X1, Frankie's estimates the store will produce net cash inflows of $50,000 in year 2, $100,000 each in years 3-5, $150,000 each in years 6-10, $175,000 each in years 11-15, and $200,000 each in years 16-20. Note that Frankie's incremental borrowing rate is 6%. 

Is the store required to be tested for impairment? Should Frankie's impair the current carrying value of the store at 12/31/X1?

Answer rating: 100% (QA)

Yes Frankies Homemade Cheese Shop is required to be tested for impairment An asset is required to be tested for impairment if there are indicators tha... View the full answer