Question

In: Accounting

On May 28, 2021, Pesky Corporation acquired all of the outstanding common stock of Harman, Inc.,...

On May 28, 2021, Pesky Corporation acquired all of the outstanding common stock of Harman, Inc., for $510 million. The fair value of Harman's identifiable tangible and intangible assets totaled $575 million, and the fair value of liabilities assumed by Pesky was $149 million. Pesky performed a goodwill impairment test at the end of its fiscal year ended December 31, 2021. Management has provided the following information: Fair value of Harman, Inc. $ 490 million Fair value of Harman's net assets (excluding goodwill) 430 million Book value of Harman's net assets (including goodwill) 518 million Required:

1. Determine the amount of goodwill that resulted from the Harman acquisition.

2. Determine the amount of goodwill impairment loss that Pesky should recognize at the end of 2021, if any.

3. If an impairment loss is required, prepare the journal entry to record the loss.

Expert Solution

Ans.1. Fair value of Harman’s identifiable assets = $575 mn

Fair value of Harman’s identifiable liabilities = $149 mn

Fair value of Harman’s net identifiable assets = $575 mn - $149 mn = $426 mn

However, price paid by Pesky for 100% acquisition of Harman = $510 mn

So, goodwill = $510 mn - $426 mn = $84 mn

Ans. 2. At the end of 2021,

Carrying value (book value) of Harman’s net assets (including goodwill) = $518 mn

Fair value of Harman’s net assets (excluding goodwill),i.e, recoverable amount = $430 mn

So, impairment loss = Carrying value of CGU(cash-generating unit) including goodwill - Fair value of CGU

= $518 mn - $430 mn = $88 mn

Ans.3. Now, goodwill = $84 mn, however, loss on impairment of goodwill = $88mn, So, the excess loss on impairment is allocated to CGU’s assets on a predefined proportion so as to reduce their carrying value. Here, since nothing is given about which asset’s carrying value to reduce, the excess is allocated to Investment in Harman Inc.

Journal entry will be as follows:

Date	Particulars	Debit amount	Credit amount
Dec.31,2021	Loss on impairment of goodwill	$88,000,000
	Goodwill		$84,000,000
	Investment in Harman Inc.		$400,000
	(Being loss on impairment of goodwill recorded)

ekkarill92 answered 2 years ago

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