Question

Francisco Inc. acquired 100 percent of the voting shares of Beltran Company on January 1, 2017. In exchange, Francisco paid $450,000 in cash and issued 104,000 shares of its own $1 par value common stock. On this date, Francisco’s stock had a fair value of $12 per share. The combination is a statutory merger with Beltran subsequently dissolved as a legal corporation. Beltran’s assets and liabilities are assigned to a new reporting unit.

The following reports the fair values for the Beltran reporting unit for January 1, 2017, and December 31, 2018, along with their respective book values on December 31, 2018.

Beltran Reporting Unit	Fair Values 1/1/17			Fair Values 12/31/18			Book Values 12/31/18
Cash	$	75,000		$	50,000		$	50,000
Receivables		193,000			225,000			225,000
Inventory		281,000			305,000			300,000
Patents		525,000			600,000			500,000
Customer relationships		500,000			480,000			450,000
Equipment (net)		295,000			240,000			235,000
Goodwill		?			?			400,000
Accounts payable		(121,000	)		(175,000	)		(175,000	)
Long-term liabilities		(450,000	)		(400,000	)		(400,000	)

Prepare Francisco’s journal entry to record the assets acquired and the liabilities assumed in the Beltran merger on January 1, 2017.

On December 31, 2018, Francisco opts to forgo any goodwill impairment qualitative assessment and estimates that the total fair value of the entire Beltran reporting unit is $1,425,000. What amount of goodwill impairment, if any, should Francisco recognize on its 2018 income statement?

Answer 1

Answer Part 1

Working Note : Computation of goodwill amount on merger on January 1, 2017.

Particular	Amount ($)
Fair Value of Shares issued (104,000 shares *  $12)	1,248,000
Cash Paid	450,000
Total Fair Value of Consideration	1,698,000
Less : Fair Value of the Net assets acquired	1,298,000
Goodwill	400,000

Journal Entry

Date	Accounts Titles & Explanation	Debit ($)	Credit ($)
January 1, 2017	Cash	75,000
	Receivables	193,000
	Inventory	281,000
	Patents	525,000
	Customer relationships	500,000
	Equipment (net)	295,000
	Goodwill	400,000
	Accounts payable		121,000
	Long-term liabilities		450,000
	Cash		450,000
	Common Stock (104,000 shares *  $1)		104,000
	Additional Paid in capital (104,000 shares *  $11)		1,144,000
	( To record the assets acquired and the liabilities assumed in the Beltran merger)

Answer Part 2

Goodwill impairment for the Year 2018

Total fair value of the entire Beltran reporting unit = $1,425,000

Book value of Beltran reporting unit ' net assets = $1,585,000

Note : Total fair value of the reporting unit is less than its book value or carrying amount , indicating goodwill impairment.

Implied Fair Vale of Goodwill

= Fair value of the entire reporting unit - Fair value of the reporting unit (excluding goodwill)

= $1,425,000 - $1,325,000 = $100,000

Goodwill impairment to be recognize in 2018 income statement

= Implied Fair Vale of Goodwill  - Book value of goodwill = $100,000 - $400,000 = $300,000