Question

In: Accounting

At the beginning of 2016, Metatec Inc. acquired Ellison Technology Corporation for $700 million. In addition...

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.

Solutions

Expert Solution

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

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