# E 11 24 general optic corporation operates a

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Chapter 10 / Exercise 1
Principles of Microeconomics
Mankiw
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E 11-24General Optic Corporation operates a manufacturing plant in Arizona. Due to a significant decline in demand forthe product manufactured at the Arizona site, an impairment test is deemed appropriate. Management hasacquired the following information for the assets at the plant:CostAccumulated depreciationGeneral's estimate of the total cash flowsto be generated by selling the products manufacturedat ist Arizona plant, not discontinued to present valueThe fair value of the Arizona plant is estimated to be \$11,000,000.Required:1. Determine the amount of impairment loss, if any.2. If a loss is indicated, where would it appear in Generals Optic's multiple-step income statement?3. If a loss is indicated, prapre the entry to record the loss.4. Repeat the requirement 1 assuming that the estimated undiscounted sum of future cash flows is \$12,0000,000instead of \$15,000,000.5. Repeat requirement 1 assuming that the estimated undiscontinued sum of future cash flows is \$19,000,000instead of \$15,000,000.Solution: Computation of the followingParticularsAmountCost\$32,500,000 Accumula\$14,200,000 Net book \$18,300,000 Fair value\$11,000,000 Cash flow\$15,000,000 Required 1Impairme\$3,300,000 Required 2The loss will appear in the company's income statement under extraordinary items other opearting expensesRequired 3Loss on impairment A/c-----\$3,300,000 Accumulated depreciation A\$14,200,000 To Plant assets A/c\$17,500,000 Required 4Net book \$18,300,000 Fair value\$12,000,000 Impairme\$6,300,000 Required 5These is no impairment loss coz expected future cash flows of \$19 million more than the book value of \$18.3 million, no impairment loss is indicatedE 11-32Howarth manufacturing Company purchased a lathe on June 30, 2007, at a cost of \$80,000. The residual value of thelathe was estimated to be \$5,000 at the end of a five-year life. The lathe was sold on March 31, 2011, for \$17,000.Howarth uses the stright-line depreciation method for all its plant and equipment. Partial-year depreciation is calculated based on the number of months the asset is in service.Required:1. Prepare the journal entry to record the sale.Solution: Computation of the journal EntriesCost\$80,000 June 30, 2007Residual \$5,000 Proceeds\$17,000 March 31, 2011DateParticularsDebitCreditJune 30, 2Equipment A/c-----\$80,000 To Cash A/c\$80,000 DecembeDepreciation expe\$7,500 To Accumulated depreciation A/c\$7,500 DecembeDepreciation expe\$15,000 To Accumulated depreciation A/c\$15,000 DecembeDepreciation expe\$15,000 To Accumulated depreciation A/c\$15,000 DecembeDepreciation expe\$15,000 To Accumulated depreciation A/c\$15,000 March 31,Cash A/c------------D\$17,000 Loss on early disp\$10,500 Depreciation expe\$3,750 Accumulated depr\$52,500 To Equipment A/c\$80,000
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Chapter 10 / Exercise 1
Principles of Microeconomics
Mankiw
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