Accounting for the Transition in Goodwill Treatment Porch Company acquired the net assets of Stairs Company on January 1, 2000, for $600,000.
The management of Porch recently adopted a vertical merger strategy. On the date of the combination (immediately before the acquisition), the assets, liabilities, and stockholders’
equity of each company were as follows: LO4 Porch Stairs Current Assets $400,000 $125,000 Plant Assets (net) 880,000. 380,000 Total Assets $1,280,000 $505,000 Total Liabilities $300,000 $100,000 Common Stock, $20 par value 400,000 200,000 Other Contributed Capital 250,000 75,000 Retained Earnings 330,000 130,000 Total Equities $1,280,000 $505,000 On the date of acquisition, the only item on Stairs’ balance sheet not recorded at fair value was plant assets, which had a fair value of $400,000. Plant assets had a 10-year remaining life, and goodwill was to be amortized over 20 years.
In 2001, the FASB issued SEAS Nos. 141 and 142, and the Porch Company adopted the new statements as of January 2002. On January 1, 2002, the fair value of Stairs’ identifiable net assets was $450,000. Stairs is considered to be a reporting unit for purposes of goodwill impairment testing. Its fair value was estimated to be $550,000 on January 1, 2002, and its carrying value (including goodwill) on that date was $600,000.
Required:
1. Prepare the journal entry as of January 1, 2000, to record the acquisition of Stairs by Porch.
2. What is the carrying value of goodwill (unamortized balance) resulting from the acquisition of Stairs as of January 1, 2002? Hint: Recall that although goodwill is no longer amortized under current GAAP, it was amortized for most companies in the years 2000 and 2001.
3. A transitional goodwill impairment test is required on the date of adoption of the new FASB standards (to be carried out within the first six months after adoption) for preexisting goodwill. Based on the facts listed above, perform the impairment test and calculate the loss from impairment, if any. If there is an impairment of goodwill, how should it be shown in the financial statements for the year 2002?
4. What transitional disclosures are required in the year of initial adoption of SFAS Nos. 141 and 142?