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K Company acquired 80 percent of the outstanding shares of Duo Company by paying $420,000 in...

K Company acquired 80 percent of the outstanding shares of Duo Company by paying $420,000 in cash. The fair value of Duo’s identifiable assets is $630,000, and the liabilities assumed by K Co. in this business combination are $205,000.

a. Please calculate the total amount of goodwill on the B/S this year. Also indicate the amount of goodwill that belongs to the noncontrolling interest account on B/S.

b. K Co. must conduct an impairment test of the goodwill related to the acquisition of Duo. The assets of Duo are the smallest group of assets that generate cash inflows, and it is a separate cash generating unit. K. Co estimated the following items:

Fair value less costs to sell is $ 370,000

Present value of future cash flows is $350,000

Please calculate the impairment loss that should be recorded on I/S.

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Expert Solution

a. Calculation of the total amount of goodwill on the B/S this year :-

fair value of Duo’s identifiable assets = $630,000

fair value of Duo’s liabilities = $205,000

fair value of Net assets = $630,000 - $205,000 = $425,000

Acquisition cost of Duo = $ 420,000

Fair value of Non contolling interest = 425,000/ *20 % = $ 85,000

Total Fair Value = $ 505,000

Less: Book Value of Net Assets of Duo (Note*) = $ 425,000

Goodwill = $ 80,000

Goodwill relating to acquisition of Duo:-

Cash paid for acquiring controlling interest = $ 420,000

Less: Share in net assets of subsidiary comapny acquired = $425,000 * 80% = $ 340,000

K company's share in Goodwill relating to acquisition of Duo = $ 80,000

Total Goodwill = $ 80,000

Less: Goodwill relating to controlling interest = $ 80,000

Non Controlling Interest's share = 0

b. Calculation of impairment loss :-

Carrying Amount of Investment = $ 420,000

Less: Recoverable Amount (Higher of following) :

Fair value less costs to sell = $ 370,000

Value in Use (Present value

of future cash flows) = $ 350,000 = $ 370,000

Impairment loss relating to goodwill = $ 50,000

Note*: Since the book value of net assets of Duo is not given, so we have assumed fair value of net assets = book value of net assets i.e. $ 425,000.

Feel free to ask any clarification, if required. Please provide feedback by thumbs up, if satisfied. It will be highly appreciated. Thank You.

ekkarill92 answered 10 months ago

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