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.

Solutions

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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