On March 31, 2015, Rodeo Company paid $6,000,000 to acquire all of the common st
ID: 2493819 • Letter: O
Question
On March 31, 2015, Rodeo Company paid $6,000,000 to acquire all of the common stock of Drive Incorporated, which became a division of Rodeo. Drive reported the following balance sheet at the time of the acquisition.
Current assets $2,400,000 Current Liabilities $500,000
Noncurrent assets 3,200,000 Long-term liabilities 300,000
Total assets $5,600,000 Stockholders' equity 4,800,000
Total liabilities and equity 5,600,000
It was determined at the date of the purchase that the fair value of the identifiable net assets of Drive was $4,500,000. Over the next 9 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, 2015, Drive reports the following balance sheet information.
Current assets $1,600,000
Noncurrent assets (including goodwill recognized in purchase) 3,800,000
Current Liabilities (600,000)
Long-term liabilities (400,000)
Net assets $4.400,000
It is determined that the fair value of the Drive Division is $4,500,000. The recorded amount for Drive’s net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value $100,000 above the carrying value.
(a) Compute the amount of goodwill recognized, if any, on March 31, 2015.
(b) Determine the impairment loss, if any, to be recorded on December 31, 2015.
(c) Assume that fair value of the Drive Division is $4,000,000 instead of $4,500,000. Determine the impairment loss, if any, to be recorded on December 31, 2015.
(d) Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement.
Explanation / Answer
Answer:(a) Goodwill = Fair value of the division less the fair value of the identifiable assets.
=$6,000,000 – $4,500,000 = 1500,000
Answer:(b) No impairment loss is recorded, because the fair value of Drive Division($4500,000) is greater than the carrying value ($4400,000) of the new assets.
Answer:(c) Computation of impairment loss:
Implied fair value of goodwill = Fair value of division less the carrying value of the division (adjusted for fair value changes), net of goodwill:
Answer:(d) Loss on Impairment. ................................................................... 50,0000
Goodwill. .......................................................................... 50,0000
Fair value of Drive division $4,000,000 Carrying value of division $4,400,000 100000 Less goodwill -1500000 ($3,000,000) Implied value of goodwill 1000000 Carrying amount of goodwill -1500000 Loss on impairment -500000Related Questions
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