Question
In: Accounting
Shaquille Company pays $1,599,600 to acquire 100% of the common stock of Revolve Incorporated. It assumes...
Shaquille Company pays $1,599,600 to acquire 100% of the common stock of Revolve Incorporated. It assumes that Revolve's plant assets (such as the factory building and land) are undervalued by $43,000. The historical cost of the net assets acquired, excluding goodwill is equal to $1,502,500. Revolve will be held as a division of Shaquille. The following information is available after 1 year the acquisition of the subsidiary company:
| Description | Debit | Credit |
| Cash | 202,000 | |
| Inventory | 309,000 | |
| Property, Plant and Equipment | 1,465,700 | |
| Goodwill | 54,100 | |
| Current Liabilities | 400,800 | |
| Common Stock-no par | 341,000 | |
| Retained Earnings | 1,289,000 | |
| Totals | 2,030,800 | 2,030,800 |
Shaquille estimated the fair value of the divisions net assets (excluding goodwill) 1 year after the date of acquisition at 1,609,000.
A. Compute the goodwill recorded on the date of acquisition. (COMPLETED)
| Acquisition Cost | 1,599,600 |
| Book Value of net assets acquired | (1,502,500) |
| Excess cost over book value | 97,100 |
| Revaluation of plant assets | (43,000) |
| Goodwill | 54,100 |
B. determine whether goodwill is impaired assuming that the fair value of the Revolve Division with goodwill 1 year after acquisition is equal to 2,004,000. Provide the impairment journal entry, if needed.
C. Determine whether goodwill is impaired assuming that the fair value of the Revolve Division with goodwill 1 year after acquisition is equal to 1,618,000. Prepare the impairment journal entry if needed.
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Expert Solution
| Company S has purchased the common stock of company of R for $1599600 | ||||||||||
| Net Assets without including goodwill are $1502500 .Assets of Company S | ||||||||||
| are undervalued $43000 | ||||||||||
| a | Computation of Goodwill on date of acquisition | |||||||||
| Description | Amount | |||||||||
| Acquisition cost(total consideration transferred) | $1,599,600 | |||||||||
| Less:Book Value of net assets acquired | $1,502,500 | |||||||||
| Excess cost over book value | $97,100 | |||||||||
| Less:Revaluation of Plant Assets | ($43,000) | |||||||||
| Goodwill | $54,100 | |||||||||
| b | Fair Value of Company S is $2004000 | |||||||||
| Thus comparing the fair value of Company S with the carrying value value of Company S | ||||||||||
| Book Value of net assets and fair value of Company S which include goodwill is | ||||||||||
| Particulars | Amount $ | |||||||||
| Common Stock | $341,000 | |||||||||
| Add Retained Earnings | $1,289,000 | |||||||||
| Total Assets | $1,630,000 | |||||||||
| Fair Value of reporting unit including goodwill | $2,004,000 | |||||||||
| It can be seen that fair value of Company S reporting unit asset is more than book value or carrying value of reporting unit | ||||||||||
| which imply that asset is not impaired.Thus no further steps are required. | ||||||||||
| Therefore no entry. | ||||||||||
| c | Fair Value of goodwill of Company S is $1618000 and book value of goodwill estimated is $1609000 | |||||||||
| Book Value of Net Assets and Fair Value of Company S which include goodwill is | ||||||||||
| Particulars | Amount | |||||||||
| Common Stock | $341,000 | |||||||||
| Add Retained Earnings | $1,289,000 | |||||||||
| Total Net Assets | $1,630,000 | |||||||||
| Fair Value of Reporting unit including Goodwill | $1,618,000 | |||||||||
| It can be seen that fair value of company S reporting unit asset is less than the book value or carrying value of | ||||||||||
| reporting unit which imply that asset is impaired. | ||||||||||
| Next is to calculate implied fair value of goodwill with carrying value and calculate loss on impairment. | ||||||||||
| Calculate implies fair value of goodwill | ||||||||||
| Particulars | Amount-$ | |||||||||
| Fair Value of reporting unit including goodwill | $1,618,000 | |||||||||
| Less fair value of assets -excluding goodwill | $1,609,000 | |||||||||
| Implied Value | $9,000 | |||||||||
| Calculate the loss of impairment on goodwill | ||||||||||
| Particulars | amount | |||||||||
| Implied value | $9,000 | |||||||||
| Less Book Value of Goodwill | ($54,100) | |||||||||
| Loss on impairment | ($45,100) | |||||||||
| Journal Entry | ||||||||||
| Date | Account Title | Debit -$ | Credit -$ | |||||||
| Loss on Impairment on goodwill | $45,100 | |||||||||
| Goodwill | $45,100 | |||||||||
| to record loss on impairment of goodwill | ||||||||||
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