Question

On July 31, 2017, Mexico Company paid $3,000,000 to acquire all of the common stock of Conchita Incorporated, which became a division of Mexico. Conchita reported the following balance sheet at the time of the acquisition.

Current assets $800,000
Noncurrent assets $2,700,000
Total assets $3,500,000
Current liabilities $600,000
Long-term liabilities $500,000
Stockholders' equity $2,400,000
Total liabilities and stockholders' equity $3,500,000
It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was $2,750,000. Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31, 2017, Conchita reports the following balance sheet information.

Current assets $450,000
Noncurrent assets (including goodwill recognized in purchase) $2,400,000
Current liabilities (700,000)
Long-term liabilities (500,000)
Net assets $1,650,000
It is determined that the fair value of the Conchita Division is $1,850,000. The recorded amount for Conchita's net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value of $150,000 above the carrying value.

Instructions:

(a) Compute the amount of goodwill recognized, if any, on July 31, 2017.

(b) Determine the impairment loss, if any, to be recorded on December 31, 2017.

(c) Assume that fair value of the Conchita Division is $1,600,000 instead of $1,850,000. Determine the impairment loss, if any, to be recorded on December 31, 2017.

(d) Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement.

Answer 1

Answer:

a. $250,000

b. Impairment loss to be recorded will be = $0

c. $200,000

d.Loss on impairment A/c Dr, $200,000

        To Goodwill A/c $200,000

(Being impairment loss is recorded)

Explanation:

a.The computation of Goodwill is shown below:-

Goodwill = Fair value of the division - Fair value of the identifiable assets

= $3,000,000 - $2,750,000

= $250,000

b. Impairment loss to be recorded will be = $0

No loss of impairment is registered, since Conchita's fair value of $1,850,000 is greater than the net assets' carrying value of $1,650,000.

c. Implied fair value of goodwill = Fair value of division - Carrying value of the division

Fair value of Conchita division                          $1,600,000

Carrying value of division         $1,650,000  

Increase in fair value of PP&E   $150,000  

Less: Goodwill                            ($250,000)    ($1,550,000)

Implied fair value of goodwill               $50,000

Carrying value of goodwill                       ($250,000)

Impairment loss                                                   $200,000

d. To record the impairment loss the Journal entry is shown below:-

Loss on impairment A/c Dr, $200,000

        To Goodwill A/c $200,000

(Being impairment loss is recorded)