At the beginning of 2014, The COMPANY acquired the COMPANY 2 for $350 million. I

Question

At the beginning of 2014, The COMPANY acquired the COMPANY 2 for $350 million.

In addition to cash, receivables, and inventory, the following allocations were made:

           Plant and equipment (depreciable assets)        $120           million

           Developed technology                                           60 million

           Goodwill                                                                80 million

The plant and equipment is depreciated over an 8-year useful life on a straight-line basis.

There is no estimated residual value.

The purchased technology is estimated to have a 6-year useful life, no residual value, and is amortized using the straight-line method.

At the end of 2016, a change in business climate indicated to management that the property, plant, and equipment and intangible assets of COMPANY 2 might be impaired. The following amounts have been determined:

Plant and equipment:

        Undiscounted sum of future cash flows                      $65 million

        Fair value                                                                        50 million

     Developed technology:

        Undiscounted sum of future cash flows                      $15 million

        Fair value                                                                        10 million

     Goodwill:

        Fair value of COMPANY 2                                                    $300 million

        Fair value of COMPANY 2's net assets (excluding goodwill)    250 million

        Book value of COMPANY 2's net assets (including goodwill)   310 million *

*After first recording any impairment losses on plant and equipment and the patent.

Factor the following:

1) Compute the book value of the plant and equipment and developed technology at the end of 2016.

2) When should the plant and equipment and the purchased technology be tested for impairment?

3) When should goodwill be tested for impairment?

4) Determine the amount of any impairment loss to be recorded, if any, for the three assets

Explanation / Answer

1) Plant and Equipment Book Value in year 2014 $130.00 Million Less: Accumulated Depreciation = $130/8 x 3 years $48.75 Million Book Value in year 2016 $81.25 Million Developed technology Book Value in year 2014 $60.00 Million Less: Accumulated Amortization = $60/6 x 3 years $30.00 Million Book Value in year 2016 $30.00 Million 2) Plant, and equipment and purchased technology( intangible assets) are tested for impairment only when events or changes in circumstances indicate book value may not be recoverable. 3) Goodwill should be tested for impairment on an annual basis and in between annual test dates if events or circumstances indicate that the fair value of the reporting unit is below its book value. 4) Plant and equipment: An impairment loss is indicated because the book value of the assets, $81.25 million, is greater than the $65 undiscounted sum of future cash flows. Book Value $81.25 million Less: Fair Value $50.00 million Impairment Loss $31.25 million Purchase Technology: An impairment loss is indicated because the book value of the assets, $30 million, is greater than the $15 undiscounted sum of future cash flows. Book Value $30.00 million Less: Fair Value $10.00 million Impairment Loss $20.00 million Goodwill: An impairment loss is indicated because the book value of the assets of the reporting unit, $310 million, is greater than the $300 million fair value of the reporting unit Implied Goodwill Fair value of Company $310.00 million Less:Fair value of Company’s net assets (excluding goodwill) $250.00 million Implied value of goodwill $60.00 million Book value of goodwill $80.00 million Less: Implied value of goodwill $60.00 million Impairment Loss $20.00 million

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