Due to Increased Competition from Low-Cost Foreign Manufacturers, Genevive's Toy

question 28

Essay

Due to increased competition from low-cost foreign manufacturers, Genevive's Toy Company is experiencing significant declines in sales. The company produces its toys from an assembly line. The equipment in this assembly line has not been previously revalued or impaired. For the year ending December 31, 2019, the controller gathered the following information relating to the assembly line equipment, which is considered to be a cash generating unit:
$$\begin{array} {| l | r | } \hline \text { Original cost } & \$ 6,379,000 \\\hline \text { Accumulated depreciation } & 2,400,000 \\\hline \text { Fair value } & 3,247,000 \\\hline \text { Costs to sell } & 145,000 \\\hline \text { Risk adjusted cost of capital } & 6 \% \\\hline & \\\hline \text { Incremental cash flows for } & \\\hline 2020 & \$ 1,100,000\\\hline 2021 & 1,000,000 \\\hline 2022 & 800,000 \\\hline 2023 & 900,000 \\\hline 2024 \text { and thereafter } & 0 \\\hline\end{array}$$

Required:
Determine whether the assembly line is impaired, and if so, the amount of the impairment.

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Definitions:

Payables Turnover

A financial ratio that shows how quickly a company pays off its suppliers by comparing net purchases to average accounts payable.

Accounts Receivable Period

The average number of days it takes for a company to collect payments from its credit sales.

Cash Cycle

The duration a company takes to convert its investments in inventory and other resources into cash flows from sales.

Inventory Period

The average time that goods remain in inventory before being sold, reflecting a company's efficiency in managing inventory.