Question
Depreciation, Goodwill, and Impairment Loss At the beginning of 2020, Brady Inc. acquired Lincoln Technology Corporation for $600 million. In addition to cash, receivables, and
Depreciation, Goodwill, and Impairment Loss
At the beginning of 2020, Brady Inc. acquired Lincoln Technology Corporation for $600 million. In addition to cash, receivables, and inventory, the following assets and their fair values were also acquired:
Plant and equipment (depreciable assets) | $150 million |
Patent | 40 million |
Goodwill | 100 million |
The plant and equipment are depreciated over a 10-year useful life on a straight-line basis. There is no estimated residual value. The patent is estimated to have a 5-year useful life, no residual value, and is amortized using the straight-line method.
At the end of 2022, a change in business climate indicated to management that the assets of Ellison might be impaired. The following amounts have been determined:
Plant and equipment: |
|
Undiscounted sum of future cash flows | $ 80 million |
Fair value | 60 million |
Patent: |
|
Undiscounted sum of future cash flows | $ 20 million |
Fair value | 13 million |
Goodwill: |
|
Fair value of Ellison Technology Corporation | $450 million |
Fair value of Ellisons net assets (excluding goodwill) | 390 million |
Book value of Ellisons net assets (including goodwill) | 470 million* |
*After first recording any impairment losses on plant and equipment and the patent. |
Required:
- Compute the book value of the plant and equipment and patent at the end of 2022.
- When should the plant and equipment and the patent be tested for impairment?
- When should goodwill be tested for impairment?
- Determine the amount of any impairment loss to be recorded, if any, for the three assets.
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