Chapter Two Fair value measurement and Impairment

Illustration (2): At the end of 2022, Verma Company tests a machine for impairment. The machine has a carrying amount of $200,000. It has an estimated remaining useful life of five years.
Because of the unique nature of the machine, there is little market-related information on which to base a recoverable amount based on fair value. As a result, Verma determines that the machine’s recoverable amount should be based on value-in-use. To determine value-in-use, Verma develops an estimate of net future cash flows based on internal company cash budgets. Verma uses a discount rate of 8 percent. Verma’s analysis indicates that its future cash flows will be $40,000 each year for five years, and it will receive a residual value of $10,000 at the end of the five years. It is assumed that all cash flows occur at the end of the year.
Value-in-Use computation:

Present value of 5 annual payments of $40,000 ($40,000 × 3.99271)	$159,708.40
Present value of residual value of $10,000 ($10,000 × .68058)	6,805.80
Value-in-use related to machine	$166,514.20

Impairment Loss Calculation Based on Value-in-Use:

Carrying amount of machine before impairment loss	$200,000.00
Recoverable amount of machine	166,514.20
Loss on impairment	$ 33,485.80

The company therefore records an impairment loss at December 31, 2022, as follows:

Loss on Impairment	33,485.80
Accumulated Depreciation—Machinery		33,485.80

The carrying amount of the machine after recording the loss is $166,514.20.