Answer: $13.8 million impairment loss on the income statement.

## 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).**

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