Starburst Manufacturing Reports the Following Long-Term Assets for Its Lighting

question 2

Multiple Choice

Starburst Manufacturing reports the following long-term assets for its lighting division: $\begin{array}{|l|r|r|} \hline& \text { Carrying value } & \begin{array}{c}\text { Estimated fair } \\\text { value }\end{array} \\\hline \text { Factory building (shared with other divisions) } & \$ 2,500,000 & \\\hline \text { Less: Accumulated depreciation } & (1,000,000 & \\\hline \text { Net book value } & \$ 1,500,000 & \$ 3,800,000 \\\hline \text { Land } & \$ 1,750,000 & \$ 3,500,000 \\\hline \text { Manufacturing equipment for lighting division } & \$ 525,000 & \\\hline \text { Less: Accumulated depreciation } &(150,000 ) & \\\hline \text { Net book value } & \$ 375,000 & \$ 340,000 \\\hline \text { General factory equipment (used in several } & \\\text { divisions) } &\$ 1,600,000 & \\\hline \text { Less: Accumulated depreciation } &(900,000 ) \\\hline \text { Net book value } & \$ 700,000 & \$ 650,000\\\hline\text { Total net fixed assets }& \$ 4,325,000\\ \hline\end{array}$

As a result of new technology, Starburst believes that the lighting division's equipment in their manufacturing facility is nearly obsolete. They project the following future cash flows for the lighting division's operations:
Future period Cash-flow projection
Year 1 $50,000
Year 2 $35,000
Year 3 $20,000
Year 4 $12,000
Year 5 $6,000
What is the impairment loss, if any, for the appropriate asset group, assuming a discount rate of 8%? (Use spreadsheet software or a financial calculator to calculate your answer.)

• A) $105,084
• B) $269,916
• C) $0
• D) $375,000

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Definitions:

Equilibrium Price

The price at which the quantity of a good or service demanded by buyers equals the quantity supplied by sellers.

Rationing Mechanism

A system designed to allocate goods or services among interested users, often used when demand exceeds supply.

Discrimination

The unjust or prejudicial treatment of different categories of people or things, especially on the grounds of race, age, or sex.

Rent Control

Government policies that limit the amount landlords can charge for renting out their property.