Question

PROBLEM 2-2 Merger and Consolidation, Goodwill Impairment Stockholders of Acme Company, Baltic Company, and Colt Company are considering alternative arrangements for a business combination. Balance sheets and the fair values of each company’s assets on October 1, 2014, whereas follows Acme Baltic Colt Assets$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$1,300,000Acme Company shares have a fair value of $50. A fair (market) price is not available for shares of the other companies 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, by the end of 2015, Acme was concerned that the fair values of one or both 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 of Fair ValueYearPresent ValueIdentifiableIdentifiable2015of Future Cash Flows Net Assets*Net AssetsBaltic$6,500,000$6,340,000$6,350,000Colt$1,900,0001,200,0001,000,000*Identifiable Net Assets do not include goodwill. Prepare the journal entry, if needed, to record goodwill impairment at December 31, 2015.LO6LO3

Answer 1

Purchase Consideration (A) = (140,000 + 40000) x $50

                                        = $9000,000

Fair Value of Assets Aquired

Fair value of assets of Baltic and Colt            = $9000,000 + $1,300,000 = $10,300,000

Less Liabilities                                                = $2,200,000 + $260,000 = $2,460,000

Fair Value of Net Assets (B)                        = $7,840,000

Goodwill (A-B)                                              = $1,160,000

ACME COMPANY

BALANCE SHEET

		Working
Assets (except goodwill)	14,200,000	$3,900,000 + 9000,000 + $1,300,000
Goodwill	1,160,000
Total Asset	15,360,000
Liabilities	4,490,000	$2,030,000 + $2,200,000 + $260,000
Common Stock	5,600,000	($180,000 x 20) + 2000,000
Other Contributed Capital	5,400,000	($50 - $20) x 180,000
Retained Earnings	-130,000
Total Liability	15,360,000

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