Question

In: Accounting

Q3. On January 1, 2016, ATM Corporation acquired all of the common stock of ZED Company...

Q3. On January 1, 2016, ATM Corporation acquired all of the common stock of ZED Company for $300,000. On that date, ZED's identifiable net assets had a fair value of $250,000. The assets acquired in the purchase of ZED are considered to be a separate reporting unit of ATM Corporation. The carrying value of ZED's investment at December 31, 2016, is $310,000. The fair value of the net assets (excluding goodwill) at that date is $220,000 and the fair value of the reporting unit is determined to be 260,000.

Required:

1) Explain how goodwill is tested for impairment for a reporting unit.

2) Determine the amount, if any, of impairment loss to be recognized at December 31, 2016.

Expert Solution

(a)

Impairment refers to the reduction in the value of asset due to negative change in the external environment of the entity. Impairment occurs when the market value is less than the recorded value (in the balance sheet) of the asset.

Impairment Recognition: The entity should test for impairment loss when there are indicators for impairment. Some of the indicators that may lead to an impairment of the asset are:

Major physical damage to the asset.
Significant changes in the Economic or legal factors.
Drastic reduction in the market price.

The goodwill must be tested for impairment annually. Acquired goodwill and other indefinite-lived intangible assets should be reported in balance sheet at fair value. Testing for impairment is required when a ‘triggering event’ (such as the economic or legal factors, loss of a key customer or unanticipated competition) occurs that could reduce the asset’s value.

Following steps are followed for testing and calculating of goodwill impairment:

Compare the fair value of the reporting unit to its carrying amount.
If the fair value is lower, then goodwill impairment should be calculated.
Goodwill impairment is calculated by subtracting the fair value of unit from the carrying value of the unit subject to the carrying value of goodwill in the books of company.

(b)

On January 1, 2016

Cost of investment at the fair value of consideration given BY ATM $300000

Less ATM’S share of the fair value of the net assets of ZED $ 250000

Goodwill attributable to ATM on 1 Jan, 2016 $ 50000

On December 31, 2016

The fair value of the reporting unit = $260000

Carrying value of the reporting unit = $310000

Because the fair value of the reporting unit ($260000) is lower than its carrying value ($310000), there is impairment of $50,000 in the operating unit, which should be first written off against goodwill of $50000 recorded in the books.

ekkarill92 answered 2 years ago

PACE Corporation acquired all of the outstanding common stock of LINK Inc. on January 1, 2016...

PACE Corporation acquired all of the outstanding common stock of LINK Inc. on January 1, 2016 in exchange for for 20,000 shares of PACE Corp's $10 par value Common Stock that was trading at $50 a share on that date. LINK Inc.'s accounting records showed a net book value on that date of $600,000: Common Stock 200,000 Retained Earnings 400,000 Total Equity 600,000 Equipment on the LINK's books with a 5-year life was undervalued by $150,000. Any additional excess fair...

Hamza Inc. acquired all of the outstanding common stock of Ali Corp. on January 1, 2016,...

Hamza Inc. acquired all of the outstanding common stock of Ali Corp. on January 1, 2016, for $372,000. Equipment with a ten-year life was undervalued on Ali's financial records by $46,000. Hamza also owned an unrecorded customer list with an assessed fair value of $67,000 and an estimated remaining life of five years. Ali Co. earned reported net income of $180,000 in 2016 and $216,000 in 2017. Dividends of $70,000 were paid in each of these two years. Selected account balances as...

Grant Company acquired 40% of the voting stock of Jake Corporation on January 1, 2016, for...

Grant Company acquired 40% of the voting stock of Jake Corporation on January 1, 2016, for $50,000,000. Basis differences were attributed entirely to goodwill. During the 5-year period from January 1, 2016 through December 31, 2020, Jake reported total net income of $23,000,000 and paid $8,000,000 in dividends. During 2021, Jake reported net income of $3,000,000 and paid $800,000 in dividends. Required: a. Calculate the balance in Investment in Jake, reported on Grant’s December 31, 2020 balance sheet. b. Calculate...

Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2016, for $693,000 cash....

Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2016, for $693,000 cash. Greenburg’s accounting records showed net assets on that date of $558,000, although equipment with a 10-year life was undervalued on the records by $71,500. Any recognized goodwill is considered to have an indefinite life. Greenburg reports net income in 2016 of $97,000 and $135,500 in 2017. The subsidiary declared dividends of $20,000 in each of these two years. Account balances for the year ending...

Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2016, for $781,000 cash....

Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2016, for $781,000 cash. Greenburg’s accounting records showed net assets on that date of $586,000, although equipment with a 10-year life was undervalued on the records by $145,000. Any recognized goodwill is considered to have an indefinite life. Greenburg reports net income in 2016 of $95,500 and $128,000 in 2017. The subsidiary declared dividends of $20,000 in each of these two years. Account balances for the year ending...

Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2016, for $922,000 cash....

Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2016, for $922,000 cash. Greenburg’s accounting records showed net assets on that date of $702,000, although equipment with a 10-year life was undervalued on the records by $163,000. Any recognized goodwill is considered to have an indefinite life. Greenburg reports net income in 2016 of $132,000 and $113,000 in 2017. The subsidiary declared dividends of $20,000 in each of these two years. Account balances for the year ending...

Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2016, for $586,000 cash....

Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2016, for $586,000 cash. Greenburg’s accounting records showed net assets on that date of $440,000, although equipment with a 10-year life was undervalued on the records by $56,500. Any recognized goodwill is considered to have an indefinite life. Greenburg reports net income in 2016 of $105,000 and $137,500 in 2017. The subsidiary declared dividends of $20,000 in each of these two years. Account balances for the year ending...

Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2016, for $646,000 cash....

Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2016, for $646,000 cash. Greenburg’s accounting records showed net assets on that date of $497,000, although equipment with a 10-year life was undervalued on the records by $66,000. Any recognized goodwill is considered to have an indefinite life. Greenburg reports net income in 2016 of $119,000 and $100,500 in 2017. The subsidiary declared dividends of $20,000 in each of these two years. Account balances for the year ending...

Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2016, for $724,000 cash....

Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2016, for $724,000 cash. Greenburg’s accounting records showed net assets on that date of $560,000, although equipment with a 10-year life was undervalued on the records by $87,500. Any recognized goodwill is considered to have an indefinite life. Greenburg reports net income in 2016 of $108,500 and $121,000 in 2017. The subsidiary declared dividends of $20,000 in each of these two years. Account balances for the year ending...

Tyler Company acquired all of Jasmine Company’s outstanding stock on January 1, 2016, for $274,700 in...

Tyler Company acquired all of Jasmine Company’s outstanding stock on January 1, 2016, for $274,700 in cash. Jasmine had a book value of only $204,900 on that date. However, equipment (having an eight-year remaining life) was undervalued by $71,200 on Jasmine’s financial records. A building with a 20-year remaining life was overvalued by $15,400. Subsequent to the acquisition, Jasmine reported the following: Net Income Dividends Declared 2016 $ 73,800 $ 10,000 2017 74,500 40,000 2018 39,000 20,000 In accounting for...