Question

Rock Solid Manufacturing, Inc., has acquired the net assets of Jelly Soft Manufacturing, Inc., for $10 million and now needs to address how the acquisition should be recorded on its books for financial reporting purposes and which intangible assets must be amortized and which must be tested for impairment in the future.

Case Study Requirements: Given the information provided below, solve for the goodwill amount then allocate the purchase price of $10 million to the appropriate assets acquired and liabilities assumed in accordance with ASC 805 – Business Combinations. Then identify which assets are tangible and which are intangible. Identify which intangible assets must be amortized and which must be tested for impairment in the future.

Fair Values:

Cash - $800

Accounts receivable - $1,500

Inventory - $850

Equipment - $500

Building - $1,200

Customer relationships (finite life) - $2,300

Patents (finite life) - $600

Trademarks (indefinite life) - $400

Goodwill – (solve for)

Accounts payable - $500

Accrued payroll - $50

Note payable – bank - $950

Answer 1

Difference between tangile and intangible assets

The tangible asset includes fixed and current assets. an intangible asset is opposite to tangible asset which includes patents, trademarks, copyrights etc.

The following are Tangible assets:

1.Cash - $800

2.Accounts receivable - $1,500

3.Inventory - $850

4.Equipment - $500

5.Building - $1,200

Intangible assets are

1.Customer relationships (finite life) - $2,300

2.Patents (finite life) - $600

3.Trademarks (indefinite life) - $400

4.Goodwill ?

Calculation of good will:

First, calculate net identifiable assets( assets are taken - liabilities taken)

I) Assets taken over

Particulars Amount($)('000)

Cash 800

Accounts receivable 1,500

Inventory 850

Equipment 500

Building 1,200

Customer relationships (finite life) 2,300

Patents (finite life) 600

Trademarks (indefinite life) 400

Total (A) 8150

II) Liabilities taken

Accounts payable 500

Accrued payroll 50

Note payable – bank 950

Total (B) 1500

net identifiable assets(A-B) 6650

Assumption: the given figures are taken in multiples of thousands.

Goodwill = consideration paid for net assets - net identifiable assets

= 1,00,00,000- 66,50,000

= 33,50,000.

journal entries for aquisition

1. assets taken over [debit] 81,50,000

Goodwill [debit] 33,50,000

liabilities [credit] 15,00,000

jellysoft manufacturing [credit] 1,00,00,000

2. Jellysoft manufacturing [ debit] 1,00,00,000

Cash/Bank [ Credit] 1,00,00,000

Amortization

Amortization is an accounting term that refers to the process of allocating the cost of an intangible

asset over a period of time

Assets with a finite life need to be amortized. assets with indefinite life need not.

so goodwill, CRM and Patents need to be amortized. Trademarks need not be amortized.

Impairment

Impairment is an accounting principle that describes a permanent reduction in the value of a

company's asset. An intangible asset which has a long period is needed to be impaired. so the trademarks which have indefinite life need to be impaired.