Reid Resch Is a Maker of Instruments for Measuring Weight

question 25

Essay

Reid Resch is a maker of instruments for measuring weight, temperature, pressure, and so on. Due to the increasing use of digital instruments, one of the company production lines based on analogue technology is potentially impaired. Management has produced the following information relating to this production line, which is considered to be a cash generating unit:
$$\begin{array} { | l | r | } \hline \text { Original cost } & \$ 4,940,000 \\\hline \text { Accumulated depreciation } & 1,800,000 \\\hline \text { Fair value } & 3,270,000 \\\hline \text { Costs to sell } & 48,000 \\\hline \text { Risk adjusted cost of capital } & 5 \% \\\hline & \\\hline \text { Incremental cash flows for } & \$ 200,000 \\\hline 2020 & 1,200,000 \\\hline 2021 & 1,200,000 \\\hline 2022 & 1,000,000 \\\hline 2023 & 0 \\\hline 2024 \text { and thereafter } & 5 \\\hline\end{array}$$ Required:
Determine whether the production line is impaired, and if so, the amount of the impairment.

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Definitions:

GDP

A country's economic activity is measured by its Gross Domestic Product, which aggregates the total value of goods and services made during a particular time.

Net Investment

The total amount spent on new capital assets minus the depreciation on existing capital assets.

Gross Investment

The total amount of investment in the economy, including investments in the replacement and acquisition of capital assets before accounting for depreciation.

Depreciation

Depreciation is the accounting process of allocating the cost of a tangible or physical asset over its useful life, reflecting the loss of value over time.