38. On January 1, Palisades, Inc., acquired 100 percent of Sherwood Company's common stock for a fair value of $120,000,000 in cash and stock. The carrying amounts of Sherwood's assets and liabilities equaled their fair values except for its equipment, which was undervalued by $500,000 and had a 10-year remaining life. Palisades specializes in media distribution and viewed its acquisition of Sherwood as a strategic move into content ownership and creation. Palisades expected both cost and revenue synergies from controlling Sherwood's artistic content (a large library of classic movies) and its sports programming specialty video operation. Accordingly, Palisades allocated all of Sherwood's assets and liabilities (including all $50,000,000 of goodwill recognized in the acquisition) to a newly formed operating segment appropriately designated as a reporting unit. However, Sherwood's assets have taken longer than anticipated to produce the expected synergies with Palisades's operations. Accordingly, Palisades reviewed events and circumstances and concluded that Sherwood's fair value likely less than its carrying amount. At year-end, Palisades assessed the Sherwood reporting unit's fair value to $110,000,000. At December 31, Palisades and Sherwood submitted the following balances for consolidation. There were no intra-entity payables on that date. Also, Palisades had not yet recorded any goodwill impairment. Page 150 Palisades, Inc. Sherwood Co. Revenues $(12,000,000) 11,800,000 80,000 (2,000,000) 109,000 897,000 Operating expenses Equity in Sherwood's earnings Dividends declared Retained earnings, 1/1 Cash Receivables (net) Investment in Sherwood Broadcast licenses Movie library Equipment (net) Current liabilities Long-term debt Common stock $(18,570,000) 10,350,000 (150,000) 300,000 (52,000,000) 175,000 210,000 120,070,000 350,000 365,000 131,000,000 (185,000) (21,915,000) (170,000,000) 14,014,000 45,000,000 17,500,000 (650,000) (7,250,000) (67,500,000) a. What is the relevant test to determine whether goodwill is impaired? b. How did Palisades determine Sherwood's December 31 carrying amount of $120,070,000? c. At what amount should Palisades record an impairment loss for its Sherwood reporting unit for the year? d. What is consolidated net income for the year? e. What is the December 31 consolidated balance for goodwill? f. Prepare a consolidated worksheet for Palisades and Sherwood (Palisades's trial balance should first be adjusted for any appropriate impairment loss). Instructions: Problem 3-38 LO 3-4, 3-6 In addition to all problem requirements, prepare a professional consolidated Income Statement, Statement of Retained Earnings, and Balance Sheet in Excel. See Chapter 4, Exhibit 4.7 as an example, except there is no noncontrolling interest. Attach here. NOTICE if financial statements are not attached and in accordance with instructions, all Connect problem credit will be forfeited
