On January 1, Prine, Inc., acquired 100 percent of Lydia Companys common stock for a fair value of $131,525,000 in cash and stock. Lydias assets and liabilities equaled their fair values except for its equipment, which was undervalued by $700,000 and had a 10-year remaining life.

Prine specializes in media distribution and viewed its acquisition of Lydia as a strategic move into content ownership and creation. Prine expected both cost and revenue synergies from controlling Lydias artistic content (a large library of classic movies) and its sports programming specialty video operation. Accordingly, Prine allocated Lydias assets and liabilities (including $59,940,000 of goodwill) to a newly formed operating segment appropriately designated as a reporting unit.

The fair values of the reporting units identifiable assets and liabilities through the first year of operations were as follows.

1. What is the relevant initial test to determine whether goodwill could be impaired?

2. At what amount should Prine record an impairment loss for its Lydia reporting unit for the year?

3. What is consolidated net income for the year?

4. What is the December 31 consolidated balance for goodwill?

5. What is the December 31 consolidated balance for broadcast licenses?

6. Prepare a consolidated worksheet for Prine and Lydia (Prines trial balance should first be adjusted for any appropriate impairment loss).

$ Account Cash Receivables (net) Movie library (25-year remaining life) Broadcast licenses (indefinite remaining life) Equipment (10-year remaining life) Current liabilities Long-term debt Fair Values 1/1 12/31 241,000 $ 810,000 525,000 1,077,500 41,200,000 68,600,000 15, 210,000 27,950,000 21,540,000 19,900,000 (491,000) (832,500) (6,640,000) (6,530,000) However, Lydia's assets have taken longer than anticipated to produce the expected synergies with Prine's operations. Accordingly, Prine reviewed events and circumstances and concluded that Lydia's fair value was likely less than its carrying amount. At year-end, Prine reduced its assessment of the Lydia reporting unit's fair value to $128,485,000. At December 31, Prine and Lydia submitted the following balances for consolidation. There were no intra-entity payables on that date. Lydia Co. $ (19,400,000) 12,000,000 Prine, Inc. $ (20,000,000) 13,100,000 (7,330,000) 400,000 (57,300,000) 472,500 232,500 138,775,000 555,000 435,000 138,400,000 (840,000) (31,900,000) (175,000,000) Revenues Operating expenses Equity in Lydia earnings Dividends declared Retained earnings, 1/1 Cash Receivables (net) Investment in Lydia Broadcast licenses Movie library Equipment (net) Current liabilities Long-term debt Common stock 80,000 (3,385,000) 810,000 1,077,500 14,280,000 47,100,000 23,100,000 (672,500) (7,490,000) (67,500,000) PRINE AND LYDIA Consolidated Worksheet December 31 Adjusting Entries Consolidated Accounts Prine, Inc. Lydia Co. Debit Credit Consolidated Totals Revenues Expenses Equity in Lydia earnings Impairment loss Net income/loss $ Retained earnings 1/1 Dividends declared Net income Retained earnings 12/31 Cash Receivables (net) Investment in Lydia, Co. Broadcast licenses Movie library Equipment (net) Goodwill Total assets Current liabilities Long-term debt Common stock Retained earnings 12/31 Total liabilities and equity $ 0 $ 0 $ 0 $ 0 $