In: Accounting
At the beginning of 2016, Metatec Inc. acquired Ellison
Technology Corporation for $700 million. In addition to cash,
receivables, and inventory, the following assets and their fair
values were also acquired:
Plant and equipment (depreciable assets) | $ | 160 | million |
Patent | 50 | million | |
Goodwill | 110 | million | |
The plant and equipment are depreciated over a 10-year useful
life on a straight-line basis. There is no estimated residual
value. The patent is estimated to have a 5-year useful life, no
residual value, and is amortized using the straight-line
method.
At the end of 2018, a change in business climate indicated to
management that the assets of Ellison might be impaired. The
following amounts have been determined:
Plant and equipment: | |||
Undiscounted sum of future cash flows | $ | 90 | million |
Fair value | 70 | million | |
Patent: | |||
Undiscounted sum of future cash flows | $ | 21 | million |
Fair value | 14 | million | |
Goodwill: | |||
Fair value of Ellison Technology Corporation | $ | 560 | million |
Fair value of Ellison's net assets (excluding goodwill) | 490 | million | |
Book value of Ellison's net assets (including goodwill) | 570 | million* | |
*After first recording any impairment losses on plant and
equipment and the patent.
Required:
1. Compute the book value of the plant and
equipment and patent at the end of 2018.
4. Determine the amount of any impairment loss to
be recorded, if any, for the three assets.
1) Calculation of book value of the plant & equipment & patent | ||||
particulars | fair value 1/16 | |||
plant & equipment (A) | 160 | |||
life of plant & equipment | 10 | |||
depreciation | 16 | |||
depreciation to date(16*3) (B) | 48 | |||
book value (A)-(B) | 112 | |||
Patent | 50 | |||
life of patent | 5 | |||
annual depreciation (50/5) | 10 | |||
depreciation to date(10*3) | 30 | |||
book value (50-30) | 20 | |||
4) Carrying value of plant & equipment | ||||
cost | 160 | |||
less: accumulated dep | 48 | |||
carrying value | 112 | |||
fair value | 70 | |||
impairment loss (112-70) = 42million | ||||
patent has no impairment loss as undiscounted value is greater than carrying value | ||||
implied value of goodwill | ||||
fair value of ellison tech cor | 560 | |||
less: fair value of ellison net assets(excluding goodwill) | 490 | |||
implied value of goodwill | 70 | |||
impairment loss of goodwill | ||||
carrying value of goodwill | 110 | |||
less: implied value of goodwill | 70 | |||
impairment loss of goodwill | 40 |