Presented below is net asset information related to the Shamrock
Division of Santana, Inc.
SHAMROCK DIVISION |
|||
Cash |
$67 |
||
Accounts receivable |
200 |
||
Property, plant, and equipment (net) |
2,611 |
||
Goodwill |
217 |
||
Less: Notes payable |
(2,606 |
) |
|
Net assets | $489 |
The purpose of the Shamrock Division is to develop a
nuclear-powered aircraft. If successful, traveling delays
associated with refueling could be substantially reduced. Many
other benefits would also occur. To date, management has not had
much success and is deciding whether a write-down at this time is
appropriate. Management estimated its future net cash flows from
the project to be $410 million. Management has also received an
offer to purchase the division for $335 million. All identifiable
assets’ and liabilities’ book and fair value amounts are the
same.
a) Prepare the journal entry to record the impairment at December 31, 2017. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
b) At December 31, 2018, it is estimated that the division’s fair value increased to $345 million. Prepare the journal entry to record this increase in fair value. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
SOLUTION
(A) Journal entry-
Date | Account titles and Explanation | Debit ($) | Credit ($) |
Dec. 31, 2017 | Loss on impairment | 154,000,000 | |
Goodwill | 154,000,000 | ||
(To record impairment at Dec.31, 2017) |
Loss on impairment-
Particulars | Amount ($) |
Fair value of dividends | 335,000,000 |
Carrying amount of division, net of goodwill | 272,000,000 |
Implied value of goodwill | 63,000,000 |
Carrying vaue of goodwill | (217,000,000) |
Loss on impairment | 154,000,000 |
(B) No entry is needed for this. After a loss is recognised in goodwill impairment the adjusted carrying amount of the goodwill is its new accounting basis. Therefore under SFAS No. 142 subsequent reversal of previously recognised impairment losses is not recognised.
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