The Mountain Top Corporation owns a large restaurant in Texas. It used to be very profitable but, in recent years, because a new highway was constructed in the area, it has been losing money. This restaurant has a historical cost of P6 million but accumulated depreciation of P2 million so that the book value is P4 million. Despite the recent problems, Mocksville plans to continue operating this restaurant for ten more years. Company officials expect to generate a positive cash inflow each year of P440,000. Those cash flows have a present value of P2.6 million based on an acceptable interest rate. In addition, company officials believe they could sell the restaurant today at a fair value of P3.5 million. Which of the following statements is true? Select one: a. The reported value of the restaurant is not impaired because the future cash flows are greater than the current book value. b. The reported value of the restaurant is not impaired because its fair value is greater than the discounted cash flows that are anticipated. c. The reported value of the restaurant is impaired and a loss of P500,000 should be recorded because the fair value is only P3.5 million. d. The reported value of the restaurant is impaired and a loss of P1.4 million should be recorded because the discounted cash flows are only P2.6 million.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The Mountain Top Corporation owns a large restaurant in Texas. It used to be very profitable but, in recent years, because a new highway was constructed in the area, it has been losing money. This restaurant has a historical cost of P6 million but accumulated depreciation of P2 million so that the book value is P4 million. Despite the recent problems, Mocksville plans to continue operating this restaurant for ten more years. Company officials expect to generate a positive cash inflow each year of P440,000. Those cash flows have a present value of P2.6 million based on an acceptable interest rate. In addition, company officials believe they could sell the restaurant today at a fair value of P3.5 million. Which of the following statements is true?

Select one:

a. The reported value of the restaurant is not impaired because the future cash flows are greater than the current book value.

b. The reported value of the restaurant is not impaired because its fair value is greater than the discounted cash flows that are anticipated.

c. The reported value of the restaurant is impaired and a loss of P500,000 should be recorded because the fair value is only P3.5 million.

d. The reported value of the restaurant is impaired and a loss of P1.4 million should be recorded because the discounted cash flows are only P2.6 million.

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