Question

On July 31, 2017, Sheridan Company paid $2,750,000 to acquire all of the common stock of Conchita Incorporated, which became a division of Sheridan. Conchita reported the following balance sheet at the time of the acquisition.

Current assets		$740,000		Current liabilities		$510,000
Noncurrent assets		2,450,000		Long-term liabilities		410,000
Total assets		$3,190,000		Stockholders’ equity		2,270,000
				Total liabilities and stockholders’ equity		$3,190,000

It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was $2,500,000. 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, 2017, Conchita reports the following balance sheet information.

Current assets		$470,000
Noncurrent assets (including goodwill recognized in purchase)		2,360,000
Current liabilities		(620,000	)
Long-term liabilities		(420,000	)
Net assets		$1,790,000

It is determined that the fair value of the Conchita Division is $1,850,000. The recorded amount for Conchita’s net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value $110,000 above the carrying value.

Determine the impairment loss, if any, to be recorded on December 31, 2017.

The impairment loss

Answer 1

In the given case Sheridan Company acquired Conchita for $ 27,50,000/-

The Fair Market Value of Conchita on the date of acquisition was $ 2500000. So excess payment made for goodwill is $250000.

At the end of the year the fair value of conchita Division is $ 1850000

An asset is required to be Impaired if its Carrying amount exceed its Recoverable amount. Recoverable amount is greatest of the following:

a. Value in Use

b.Fair Value

Therefore in this case Goodwill have no value since it is incurring losses.So Goodwill of the Conchita Division having value of $ 250000 should be impaired first.

After impairing the goodwill the remaining assets which have carrying amount in excess of fairvalue should be impaired.But the carrying amount is not exceeding the fairvalue in case of other assets so not impairment require for other assets.