Herron Realty company owns a number of large office buildings in several cities
ID: 2367284 • Letter: H
Question
Herron Realty company owns a number of large office buildings in several cities in the United States. One of the buildings, is 16 years old and has a large number of vacant office suites for several years. the building's book value is 13 million. The company has examined carefully its future cash flows and has determined that it is highly unlikely that the company can recover the buildings book value from future cash flows. Further study in November 2013 has resulted in three estimates of the market value of the building. All of the estimates of value are approximately 8.2 million 1. Should Herron record impairment of the building?why? 2. If impairment should be recorded, what is the amount of impairment? 3. What accounting entry would be necessary based on the above facts? 4. If impairment is recorded in 2013 and subsequently the value of the building increases in 2014 so that the market value exceeds the book value, should the book value of the building be increased at that time?Explanation / Answer
1. Yes - you would claim impairment because the loss is viewed as more than temporary (this hint was given in the question when it stated the offices had been vacant for years). 2. The amount of impairment would be the equivalent of the book value - the market value so in this case you're looking at $13M - $8.2M = $4.8M 3. Journal entry is recorded under the income statement as a loss: Impairment Loss $4,800,000 Accumulated Impairment Losses $4,800,000 4. Depends on if they sell the building or not. If they're not selling hte building, then yes, you would want to journailze the income as below: Accumulated Impairment Loss $4,800,000 Building whatever your increase is above book value Gain In Value of Building $4,800,000 Surplus whatever your increase was Please rate. :)