The Eaton Manufacturing Company decided to expand further by purchasing the Ball
ID: 2592218 • Letter: T
Question
The Eaton Manufacturing Company decided to expand further by purchasing the Ball Company. The balance sheet of Ball Company as of December 31, 2013 was as follows:
Ball Company
Balance Sheet 12/31/13
Assets
Liabilities & Equity
Cash
$ 212,500
Accounts payable
$ 325,000
Receivables
450,000
Common stock
800,000
Inventory
275,000
Retained earnings
837,500
Plant assets (net)
1,025,000
Total assets
$1,962,500
Total equities
$1,962,500
An appraisal, agreed to by the parties, indicated that the book values and fair market values of the net assets were the same except for inventory which had a fair market value of $350,000 and the plant assets which had a fair market value of $1,225,000. The agreed purchase price was $2,100,000, and this amount was paid in cash.
Shortly after the acquisition, the newly acquired Company (a reporting unit) started experiencing operating losses due to unexpected competition which will continue. At December 31, 2014, the book value of the reporting unit was $2,000,000, the fair value of the reporting unit was $1,900,000 and the fair value of the identifiable net assets within the reporting unit were $1,800,000.
REQUIRED:
Determine the amount of goodwill in the purchase price of $2,100,000.
Determine the impairment loss (if any) to be recorded on December 31, 2014.
Assets
Liabilities & Equity
Cash
$ 212,500
Accounts payable
$ 325,000
Receivables
450,000
Common stock
800,000
Inventory
275,000
Retained earnings
837,500
Plant assets (net)
1,025,000
Total assets
$1,962,500
Total equities
$1,962,500
Explanation / Answer
ans) Calulation of amount of goodwill
Purchase price 2,100,000
Less tangible net assets acquired:
Book value ($1962500 - 325000) 1637500
Appraisal increment—inventory 75000
Appraisal increment—plant assets 200,000
Total fair market value of tangible net assets acquired (1912500)
Goodwill$ 187500
2) Fair value of identifiable net assets with in the reporting unit = 1,800,000
Book value of the reporting umit = (2,000,000)
Impairment loss (200,000)
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