Problem 3-38 (Algo) (LO 3-4, 3-6)

On January 1, Palisades, Inc., acquired 100 percent of Sherwood Companys common stock for a fair value of $120,340,000 in cash and stock. The carrying amounts of Sherwoods assets and liabilities equaled their fair values except for its equipment, which was undervalued by $534,000 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 Sherwoods artistic content (a large library of classic movies) and its sports programming specialty video operation. Accordingly, Palisades allocated all of Sherwoods assets and liabilities (including all $49,745,000 of goodwill recognized in the acquisition) to a newly formed operating segment appropriately designated as a reporting unit.

However, Sherwoods assets have taken longer than anticipated to produce the expected synergies with Palisadess operations. Accordingly, Palisades reviewed events and circumstances and concluded that Sherwoods fair value was likely less than its carrying amount. At year-end, Palisades assessed the Sherwood reporting units fair value to $110,340,000.

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.

	Palisades, Inc.			Sherwood Co.
Revenues	$	(18,570,000	)	$	(12,340,000	)
Operating expenses		10,350,000			12,140,000
Equity in Sherwood's earnings		(146,600	)
Dividends declared		385,000			114,000
Retained earnings, 1/1		(52,510,000	)		(2,391,000	)
Cash		396,000			126,000
Receivables (net)		244,000			914,000
Investment in Sherwood		120,372,600
Broadcast licenses		435,000			14,048,000
Movie library		450,000			45,340,000
Equipment (net)		131,170,000			17,670,000
Current liabilities		(202,000	)		(735,000	)
Long-term debt		(22,000,000	)		(7,420,000	)
Common stock		(170,170,000	)		(67,670,000	)

1. Prepare a consolidated worksheet for Palisades and Sherwood (Palisadess trial balance should first be adjusted for any appropriate impairment loss).

PALISADES AND SHERWOOD
Consolidated Worksheet
December 31
			Consolidated Entries
Accounts	Palisades, Inc.	Sherwood Co.	Debit	Credit	Consolidated Totals
Revenues	$(18,570,000)	$(12,340,000)			$(30,910,000)
Expenses	10,350,000	12,140,000			22,543,400
Equity in Sherwood earnings	(146,600)				0
Impairment loss
Net income/loss		$(200,000)
Retained earnings 1/1	$(52,510,000)	$(2,391,000)	2,391,000
Dividends declared	385,000	114,000			385,000
Net income/loss		(200,000)
Retained earnings 12/31	$51,143,600	$(2,477,000)			$(51,143,600)
Cash	$396,000	$126,000			$522,000
Receivables (net)	244,000	914,000			1,158,000
Investment in Sherwood			114,000		0
Broadcast licenses	435,000	14,048,000			14,483,000
Movie library	450,000	45,340,000			45,790,000
Equipment (net)	131,170,000	17,670,000	534,000		149,320,600
Goodwill					40,397,000
Total assets		$78,098,000			$251,670,600
Current liabilities	$(202,000)	$(735,000)			$(937,000)
Long-term debt	(22,000,000)	(7,420,000)			(29,420,000)
Common stock	(170,170,000)	(67,670,000)	67,670,000		(170,170,000)
Retained earnings 12/31		(2,477,000)			(51,143,600)
Total liabilities and equity	$(192,372,000)	$(78,302,000)	$70,709,000	$0