Issues In March 2007, retail pharmacy giant CVS acquired all the shares of Caremark Rx, Inc. ("Caremark"), for about $26.9 billion. Caremark effectively became a newly formed subsidiary of CVS. Following the merger, the company changed its name to CVS Caremark Corporation. The company assigned $20.8 billion to goodwill and $9.4 billion to identifiable intangibles. Other assets amounted to about $4.8 billion. About $3 billion of the identifiable intangibles have average useful lives of 15 years; the $6.4 billion remaining are indefinite-lived intangibles (trade names).
Assume that the pre-acquisition book value of identifiable intangibles was $5 billion, of which $1 billion is limited-lived intangibles, and the remainder is indefinite-lived trade names acquired in previous business combinations. Limited-lived intangibles are straight-line amortized beginning in the month following acquisition. Also assume the goodwill relates to two reporting units (segments) within the new subsidiary and to the Pharmacy Services segment within CVS. The company reported no impairment of goodwill or the indefinite-lived intangibles. Assume also that the new subsidiary earned $1 billion in the nine months after the acquisition, and paid dividends of $550 million. The book values of all other assets acquired and liabilities assumed already approximated their fair values. In your answers below, present all dollar amounts in millions. CVS has a December 31 year-end.
Required
a. Calculate the apparent amount of liabilities assumed in the acquisition of Caremark.
b. Briefly describe management's considerations in deciding on the reported amounts of definite- and indefinite-lived intangibles.
c. Briefly explain whether the amounts of goodwill assigned to the three segments could have an effect on consolidated net income.
d. Compute the equity income accrual for the post-acquisition period in 2007 and prepare the December 31,2007, consolidation working paper entries. •