AUDIT MEMORANDUM
To: First Motors Corporation
From: Nam Do
CC: Dr. Jeff Archambault
Date: 11/10/2011
Re: The Accounting Policies and Procedures
Purpose:
The purpose of the audit memo is to clarify the accounting policies and procedures used by clients and the accounting policies and procedures that should be followed. The audit memorandum also provides a clear explanation of a difference between the risk premium in discounting the free cash flow from Plant 3 and the risk premium in discounting the cash flows for the Macinaw Division and which of the appropriate discount rate for computation of goodwill impairment. The case mentioned about impairments which will be written down after the assets are tested for impairments and how …show more content…

If the events or changes indicate that the carrying amount of the asset may not be recoverable, a recoverability test is used to determine whether impairment has occurred and then we come up the impairment measurement. The table below showed the computation of the long-lived asset impairment loss at both 3 percent discount rate and the 9 percent discount rate

| 3% discount rate | 9% discount rate | Net book value - Plant 3 | 1,400,000,000 | 1,400,000,000 | Fair value over 11 years with discount rate | (600,002,144.12) | (436,980,181.30) | Impairment loss | 799,997,855.88 | 963,019,818.70 | | Present value=( 3%,11, $62,504,377, $30,000,000) | Present value =( 9%,11, $62,504,377, $30,000,000) | | | | | | |
Information provided: * Yearly anticipated net cash flows: $62,504,377 * The total estimated undiscounted net cash flows: $717,548,147 * Plant 3 at end of 11 years: $30,000,000
Once an impairment loss is recorded, the reducing carrying amount of assets of Plant 3 held for use becomes its new cost basis. An impairment loss should be applied only to the covered long-lived assets in the group. Allocation of