Modern Company acquires the net assets of Frontier Company for $1,300,000 on January 1, 2011. A business valuation consultant arrives at the price and deems it to be a good value.
Part A. The following list of fair values is provided to you by the consultant:

Required
Using the information in the preceding table, confirm the accuracy of the present value calculations made for the building, patent, and mortgage payable.
Part B. Frontier does not have publicly traded stock. You make an estimate of the value of the company based on the following assumptions that will later be included in the reporting unit valuation procedure:
a. Frontier will provide operating cash flows, net of tax, of $150,000 during the next fiscal year.
b. Operating cash flows will increase at the rate of 10% per year for the next four fiscal years and then will remain steady for 15 more years.
c. Cash flows, defined as net of cash from operations less capital expenditures, will be discounted at an after-tax discount rate of 12%. An annual rate of 12% is a reasonable risk-adjusted rate of return for investments of this type.
d. Added capital expenditures will be $100,000 in year 5, $120,000 in year 10, and $130,000 in year 15.
e. An estimate of salvage value (net of the tax effect of gains or losses) of the assets after 20 years is estimated to be $300,000. This is a conservative assumption since the unit may be operated after that period.
Required
1. Prepare a schedule of net-of-tax cash flows for Frontier and discount them to present value.
2. Compare the estimated fair value of the reporting unit with amounts assigned to identifiable assets plus goodwill less liabilities.
3. Record the acquisition.
Part C. Revisit the information in Part A that illustrates the reporting unit valuation procedure. Assume that by fiscal year-end, December 31, 2011, events occur that suggest goodwill could be impaired. You have the following information. These new estimates are made at the end of the first year:
Net book value of Frontier Company including goodwill ......... $1,300,000
Estimated implied fair value of the reporting unit, based on cash flow
analysis discounted at a 12% annual rate ............... 1,200,000
Estimated fair value of identifiable net assets using methods excluding
Goodwill............................. 1,020,000
Required
Has goodwill been impaired? Perform the impairment testing procedure. If goodwill has been impaired, calculate the adjustment to goodwill and make the needed entry.

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Assets and Liabilities Comments Valuation Method Fair Value Cash equivalents Seller' Exisling book value Market replacement cost for Aging schedule is used for Calculation is based on 20 acres Rant is estimated at $80,000 per s values are $80,000 150,000 180,000 200,000 accepted. Replocement cost is Inventory Accounts receiable Asset is adjusted for Land Building available estimated bad debts. established rent potential. similar items is used. valuation at $10,000 per acre Per-acre value is well Most reliable measure is year for 20 years, discounted at 14% return for similar properties. Present value is reduced for land value 329,850 Equipment Cost of replacement Estimated purchase cost of capacity can be estimated equipment with similar capacily is used. 220,000 Patent Recorded by seller at only Added profit made possible by patent is $40,000 per year for four years. Discounted at risk- adjusted rate for similar investments of 20% per year legal cost; has significant future value.four 103,550 (120,000) Current liabilities Reoded amounts are Recorded value is used accurate. Mortgage payable Specified interest rate is Discount the $50,000 annual below market rate. ts for five years at payments annual market rate of 7%. -(205,010) , Net identifiable assets at fair value 938,390 Price paid for 1,300,000 reporting unit Goodwill Believed to exist based on Implied by price paid. repulation and customer list. $361.610