Bean World Company Produces Two Distinct Product Lines: Dried Beans

question 118

Essay

Bean World Company produces two distinct product lines: dried beans and canned beans. Due to changing consumer tastes, the company is evaluating these two cash generating units for impairment for the year ending December 31, 2019. Relevant information is as follows:
$$\begin{array} { | l | r | r | } \hline & \text { Dried beans } & \text { Canned beans } \\\hline \text { Original cost } & \$ 7,222,000 & \$ 12,536,000 \\\hline \text { Accumulated depreciation } & 2,500,000 & 4,200,000 \\\hline \text { Fair value } & 5,062,000 & 8,916,000 \\\hline \text { Costs to sell } & 90,000 & 340,000 \\\hline \text { Risk adjusted cost of capital } & 5 \% & 5 \% \\\hline & & \\\hline \text { Incremental cash flows for } & & \\\hline 2020 & \$ 800,000 & \$ 2,400,000 \\\hline 2021 & 1,200,000 & 3,400,000 \\\hline 2022 & 1,300,000 & 3,700,000 \\\hline 2023 & 1,700,000 & 0 \\\hline 2024 \text { and thereafter } & 0 & 0 \\\hline\end{array}$$ Required:
Determine whether either product line is impaired, and if so, the amount of the impairment.

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Definitions:

API Gravity

A measure of how heavy or light a petroleum liquid is compared to water, used in the oil industry to classify oils.

Price Per Barrel

The cost for a barrel of commodities such as oil or beer, typically used to measure large quantities.

Least Squares Regression

A statistical method used to determine the best-fitting line through a set of data points by minimizing the sum of the squares of the vertical distances of the points from the line.

Correlation Analysis

The statistical technique used to determine the degree to which two or more quantitative variables are related to one another.