Exercise 6-22 Killroy Company owns a trade name that was purchased in an acquisi

Question

Exercise 6-22

Killroy Company owns a trade name that was purchased in an acquisition of McClellan Company. The trade name has a book value of $3,500,000, but according to GAAP, it is assessed for impairment on an annual basis. To perform this impairment test, Killroy must estimate the fair value of the trade name. It has developed the following cash flow estimates related to the trade name based on internal information. Each cash flow estimate reflects Killroy’s estimate of annual cash flows over the next 12 years. The trade name is assumed to have no salvage value after the 12 years. (Assume the cash flows occur at the end of each year.)

Explanation / Answer

Following assumptions have been made

(a) NPV of future cashflow are $3600000

(b) NPV of future cashflow are $3500000

(c) NPV of future cashflow are $3400000

Particulars $3600000 $3500000 $3400000 Book Value $3500000 $3500000 $3500000 Impaired or not No No Yes Impairment Loss Nil Nil $100000

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