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PROBLEM 2-2Merger and Consolidation, Goodwill Impairment Stockholders of Acme Company, Baltic Company, and Colt Company are...

PROBLEM 2-2Merger and Consolidation, Goodwill Impairment Stockholders of Acme Company, Baltic Company, and Colt Company are considering alternative arrangementsfor a business combination. Balance sheets and the fair values of each company’s assets on October 1, 2014, wereas follows:

AcmeBalticColtAssets$3,900,000$7,500,000$950,000Liabilities$2,030,000$2,200,000$260,000Common stock, $20 par value2,000,0001,800,000540,000Other contributed capital—0—600,000190,000Retained earnings (deficit)(130,000)2,900,000(40,000)Total equities$3,900,000$7,500,000$950,000Fair values of assets$4,200,000$9,000,000$1,300,000

Acme Company shares have a fair value of $50. A fair (market) price is not available for shares of the othercompanies because they are closely held. Fair values of liabilities equal book values.

Required

:A.Prepare a balance sheet for the business combination. Assume the following: Acme Company acquires all theassets and assumes all the liabilities of Baltic and Colt Companies by issuing in exchange 140,000 shares ofits common stock to Baltic Company and 40,000 shares of its common stock to Colt Company.

B.Assume, further, that the acquisition was consummated on October 1, 2014, as described above. However, bythe end of 2015, Acme was concerned that the fair values of one or both of the acquired units had deteriorated.To test for impairment, Acme decided to measure goodwill impairment using the present value of future cashflows to estimate the fair value of the reporting units (Baltic and Colt). Acme accumulated the following data:

Carrying Value ofFair ValueYearPresent Value Identifiable Identifiable 2015 of Future Cash FlowsNet Assets*Net AssetsBaltic$6,500,000$6,340,000$6,350,000Colt$1,900,0001,200,0001,000,000

Prepare the journal entry, if needed, to record goodwill impairment at December 31, 2015.

Solutions

Expert Solution

Price paid (140+40)*50 9000
Fair value of net assets acquired :
Fair value of assets of Baltic and colt 10300
Less liabilities assumed 2460
Fair value of net assets 7840
Goodwill 1160

Acme company

Balance sheet

Assets
Assets (3900+9000+1300) 14200
Goodwill 1160
Total assets 15360
Total liabilities and stockholders equity
Liabilities (2030+2000+260) 4490
Common Stock (180*20)+2000 5600
Other contributed capital (180*(50-20)) 5400
Retained earnings (130)
Total liabilities and stockholders equity 15360

Part B

Baltic

Total carrying value

Financial value of the reporting unit 6500000
Carrying value of unit:
Carrying value of net identifiable assets 6340000

Carrying value of Goodwill

(140000*50)-(9000000-2200000)

 200000
Total carrying value 6540000

Carrying value is higher than fair value and thus there is impairment loss.

Fair value of net reporting unit 6500000
Fair value of net identifiable assets 6350000
Implied value of Goodwill 150000
Recorded value of Goodwill 200000
Impairment loss (200000-150000) 50000

Colt

Total carrying value

Financial value of reporting unit 1900000
Carrying value of unit:
Carrying value of net identifiable assets 1200000
Carrying value of Goodwill 960000
Total carrying value 2160000

Carrying value is higher than fair value and thus there is impairment loss.

Fair value of net reporting unit 1900000
Fair value of net identifiable assets 1000000
Implied value of Goodwill 900000
Recorded value of Goodwill 960000
Impairment loss (960000-900000) 60000

ekkarill92 answered 1 year ago
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