Panza Inc. owns a plant in Toronto with a carrying value of $ 3,600,000 as at October 31, the company’s fiscal year end. The fair value of the plant is $ 3,400,000. The net cash flows from the plant, over the next 25 years the company expects to use the plant, amount to $100,000 per year. The residual value of the plant at the end of 25 years is $500,000. The present value of the net cash flows of $100,000 per year, using a reasonable rate is $1,165,000. The present value of the residual value is $190,000. What is the amount by which the company must write down the plant as at the year end based on ASPE?

Panza Inc. owns a plant in Toronto with a carrying value of $ 3,600,000 as at October 31, the company’s fiscal year end. The fair value of the plant is $ 3,400,000. The net cash flows from the plant, over the next 25 years the company expects to use the plant, amount to $100,000 per year. The residual value of the plant at the end of 25 years is $500,000. The present value of the net cash flows of $100,000 per year, using a reasonable rate is $1,165,000. The present value of the residual value is $190,000. What is the amount by which the company must write down the plant as at the year end based on ASPE?

The plant would be written down to the recoverable amount which is based on the undiscounted cash flows to be derived from both using the plant and disposing of it.

Cash flows from using the plant amount to $2,500,000 (i.e. 25 years X $100,000 per year) plus the residual value of $500,000 equals $3,000,000.

The company would therefore have to write down the plant, as the carrying value ($3,600,000) is greater than the recoverable amount ($3,000,000).  The writedown would be $200,000, to $3,400,000, the fair market value.

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