Rock Solid Manufacturing, Inc., has acquired the net assets of Jelly Soft Manufa
ID: 2339043 • Letter: R
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
Explanation / Answer
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.
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