Question

At the beginning of 2016, Metatec Inc. acquired Ellison Technology Corporation for $680 million. In addition to cash, receivables, and inventory, the following assets and their fair values were also acquired:

Plant and equipment (depreciable assets)	$	158	million
Patent		48	million
Goodwill		120	million

The plant and equipment are depreciated over a 10-year useful life on a straight-line basis. There is no estimated residual value. The patent is estimated to have a 5-year useful life, no residual value, and is amortized using the straight-line method.

At the end of 2018, a change in business climate indicated to management that the assets of Ellison might be impaired. The following amounts have been determined:

Plant and equipment:
Undiscounted sum of future cash flows	$	88	million
Fair value		68	million
Patent:
Undiscounted sum of future cash flows	$	21	million
Fair value		14	million
Goodwill:
Fair value of Ellison Technology Corporation	$	538	million
Fair value of Ellison's net assets (excluding goodwill)		470	million
Book value of Ellison's net assets (including goodwill)		550	million*

*After first recording any impairment losses on plant and equipment and the patent.

Required:

1. Compute the book value of the plant and equipment and patent at the end of 2018.

2. Determine the amount of any impairment loss to be recorded, if any, for the three assets.

Compute the book value of the plant and equipment and patent at the end of 2018. (Enter your answers in millions. Round your final answers to nearest whole dollar.)

Book value

Plant and equipment	?	millions
Patent	?	millions

2. Determine the amount of any impairment loss to be recorded, if any, for the three assets. (Enter your answers in millions. Round your final answers to nearest whole dollar.)

                                                           Impairment loss

Plant and equipment	?	millions
patent	?	millions
goodwill	?	millions

Answer 1

Solution:
1.	Book value
	Plant and equipment	$ 110.60	millions
	Patent	$ 19.20	millions
Working Notes:
Plant and equipment
	Purchase price		$158 million
	Less: Depreciation till 2018		$47.40 million
	[(cost -salvage value) x year expired/Life]
	[(158-0) x 3/10 = $47.40 ]
	Book value of Plant and equipment		$110.60 million
	[$158 - $47.40= $110.60 ]
Patent
	Purchase price		$48 million
	Less: Depreciation till 2018		$28.80 million
	[(cost -salvage value) x year expired/Life]
	[(48-0) x 3/5 = $28.80 ]
	Book value of Plant and equipment		$19.20 million
	[$48 - $28.80= $19.20 ]
2.	Impairment loss
	Plant and equipment	$ 42.60	millions
	patent	$ 0	millions
	goodwill	$ 52.00	millions
Working Notes:
Plant and equipment
	Impairment Loss on Plant & Equipment to be recognized, since Book Value ($110.60 Millions) > Undiscounted Sum of Future Cash Inflow ($88 Millions)
	Book Value	$                          110.60	millions
	Fair value	$                             68.00	millions
	Impairment Loss	$                             42.60	millions
	[$110.60 - $68 =$42.60 million ]
patent
	Book Value (19.20 Millions) < Undiscounted Sum of Future Cash Inflow (21 Millions)
	There is no impairment loss on Patent.
Goodwill
	Impairment Loss on goodwill to be recognized, since Book Value of assets ($550 Millions) > Fair Value of reporting Unit ($538 Millions)
	Computation of implied goodwill
	Fair value of Ellison Technology Corporation		$538 million
	Fair Value of Ellison, net Assets, excluding Goodwill		$470 million
	Implied Value of Goodwill		$68 million
	[538 - 470 = $68 million][
	Measurement of impairment loss:
	Book Value of Goodwill	$120	million
	Implied Value of Goodwill	$68	million
	Impairment Loss	$52	million
	[$120 -$68 = $52 million ]
Please feel free to ask if anything about above solution in comment section of the question.