Question

On July 31, 2020, Mexico Company paid $3,000,000 to acquire all of the common stock of...

On July 31, 2020, Mexico Company paid $3,000,000 to acquire all of the common stock of Conchita Incorporated, which became a division (a reporting unit) of Mexico. Conchita reported the following balance sheet at the time of the acquisition.

Current assets               $  800,000                               Current liabilities $      600,000

Noncurrent assets           2,700,000                               Long-term liabilities      500,000

Total assets                   $3,500,000                               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, 2020, 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 

Finally, it is determined that the fair value of the Conchita Division is $1,850,000.

Instructions

a. Compute the amount of goodwill recognized, if any, on July 31, 2020. (Note: you can’t do a JE here because you don’t have the values of the individual assets and liabilities but the concept remains the same).

b. Determine the impairment loss, if any, to be recorded on December 31, 2020.

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, 2020.

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

Homework Answers

Answer #1

A)

Goodwill= Fair value of the division - fair value of the identifiable assets = $3,000,000 - $2,750,000 = $250,000

B)

No impairment loss is recorded, because the fair value of Conchita $1,850,000 is greater than the carrying value of the net assets $1,650,000. Hence impairment loss = $0

C)

Fair value of Conchita division $1600000
Carrying value of division $1650000
Less: goodwill ($250000)
($1400000)
Implied fair value of goodwill $200000
Carrying value of goodwill ($250000)
Impairment loss $50000

.

D)

Loss on impairment $50000
Goodwill $50000

.

IN CASE OF ANY QUERY PLEASE COMMENT

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