Exercise 6-22 The trade name has a book Pearl Company owns a trade name that was

Question

Exercise 6-22 The trade name has a book Pearl Company owns a trade name that was purchased in an acquisition of McClellan Company. value of $3,500,000, but according to GAAP, it is assessed for impairment on an annual basis. To perform this impairment test, Pearl 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 Pearl's estimate of annual cash flows over the next 8 years. The trade name is assumed to have no salvage value after the 8 years. (Assume the cash flows occur at the end of each year.) Cash Flow Estimate $384,700 633,500 753,700 Probability Assessment 20% 50% 3096 Click here to view factor talb (a) What is the estimated fair value of the trade name? Pearl determines that the appropriate discount rate for th estimation is 8%. (Round factor values to 5 decimal places, eg. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) Estimated fair value s

Explanation / Answer

a) Calculation of Estimated fair value of the trade name :-

Step 1 : Calculation of annual cash estimate

Step 2 : Calculation of Fair Value of Trade name

Present value of annual cash flow = $619,800*PVAF(8%,8 yrs) = $619,800*5.74664 = $3,561,767

Thus Estimated Fair value of the trade name is $3,561,767.

Cash Flow estimate Probability Assessment Cash Flow*Probability $384,700 20% $76,940 $633,500 50% $316,750 $753,700 30% $226,110 Total annual cash flow estimate $619,800

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