Asset Impairment
Response to the following problem:
Delta Company owns plant and equipment on the island of Lagos. The cost and book value of the building are $2,800,000 and $2,400,000, respectively. Until this year, the market value of the factory was $7 million. However, a new dictator just came to power and declared martial law. As a result of the changed political status, the future cash inflows from the use of the factory are expected to be greatly reduced. Delta now believes that the output from the factory will generate cash inflows of $100,000 per year for the next 20 years. In addition, the market value of the factory building is now just $1,300,000. Delta is not sure how to account for the sudden impairment in value.
Required:
1. Explain how to decide whether an impairment loss is to be recognized.
2. Prepare the necessary journal entry, if any, to account for an impairment in the value of the factory.