Explanation

This question involves impairment testing under US GAAP (ASC 360). Here's the step-by-step analysis:

1. Calculate the Present Value of Expected Future Cash Flows

The facilities are expected to generate $3 million per year for 7 years at a 10% cost of capital.

Using the present value of an ordinary annuity formula: $PV = PMT \times \frac{1 - (1 + r)^{-n}}{r}$ $PV = 3,000,000 \times \frac{1 - (1 + 0.10)^{-7}}{0.10}$ $PV = 3,000,000 \times \frac{1 - (1.10)^{-7}}{0.10}$ $PV = 3,000,000 \times \frac{1 - 0.513158}{0.10}$ $PV = 3,000,000 \times \frac{0.486842}{0.10}$ $PV = 3,000,000 \times 4.86842$ PV = \`$14`,605,260

2. Compare to Carrying Amount

• Carrying amount (net book value): $28.4 million
• Recoverable amount (present value of future cash flows): $14.605 million

Since the recoverable amount ($14.605 million) is less than the carrying amount ($28.4 million), an impairment exists.

3. Calculate Impairment Loss

Impairment loss = Carrying amount - Recoverable amount \`$28`,400,000 - \`$14`,605,260 = \`$13`,794,740 This rounds to approximately $13.8 million.

4. Accounting Treatment under US GAAP

• The impairment loss of $13.8 million is recognized on the income statement as an expense
• The carrying amount on the balance sheet is reduced by $13.8 million
• No direct impact on operating cash flows - impairment is a non-cash charge

5. Why Option B is Correct

• Option A (reduction in operating cash flows): Incorrect - impairment is a non-cash charge that doesn't affect operating cash flows
• Option B (impairment loss on income statement): Correct - under US GAAP, impairment losses are recognized on the income statement
• Option C (reduction in balance sheet carrying amount): Partially true but incomplete - while the balance sheet carrying amount is reduced, the primary financial statement impact is the impairment loss on the income statement

6. Key US GAAP Rules

• Under ASC 360, long-lived assets are tested for impairment when events or changes indicate the carrying amount may not be recoverable
• The impairment test compares carrying amount to undiscounted cash flows (step 1), then if impaired, measures impairment as carrying amount minus fair value (or discounted cash flows)
• Impairment losses reduce the asset's carrying amount and are recognized as expenses on the income statement

Therefore, the company will report a $13.8 million impairment loss on the income statement (Option B).