Question
The Brigatti Company pays $1,560,000 to acquire 100% of the common stock of Cornish Incorporated. It assumes that Cornishs plant assets (such as the factory
The Brigatti Company pays $1,560,000 to acquire 100% of the common stock of Cornish Incorporated. It assumes that Cornishs plant assets (such as the factory building and land) are undervalued by $40,000. The historical cost of the net assets acquired, excluding goodwill, is equal to $1,500,000. Cornish will be held as a division of Brigatti. The following information is available one year after the acquisition of the subsidiary company (i.e., the reporting unit):
Brigatti estimated the fair (appraisal) value of the divisions net assets (excluding goodwill) at $1,605,000 one year after the date of acquisition.
Required
Compute goodwill recorded on the date of acquisition.
Determine if goodwill is impaired assuming that the fair value of the Cornish Division with goodwill is equal to $2,000,000 one year after acquisition. Provide the impairment journal entry, if needed.
Determine if goodwill is impaired assuming that the fair value of the Cornish Division with goodwill is equal to $1,608,000 one year after acquisition. Prepare the impairment journal entry, if needed.
The plant assets to be sold should be reclassified as Machinery Held for Sale and Equipment Held for Sale.
| Account | Date of Decision to Dispose | |
| Accumulated DepreciationMachinery |
|
|
| Machinery Held for Sale |
|
|
| Machinery |
|
|
| Account | Date of Decision to Dispose | |
| Accumulated DepreciationEquipment |
|
|
| Equipment Held for Sale |
|
|
| Equipment |
|
|
In order to determine the amount of write-down, if any, we compare the carrying values with the fair values. Note that assets held for disposal are not subject to depreciation.
| Subsequent Year |
Machinery |
Equipment | Writedown (Recovery) |
| Year 1 Fair value |
|
|
|
| Carrying value |
|
|
|
| Loss |
|
|
|
|
|
|
|
|
| Year 2 Fair value |
|
|
|
| Carrying value |
|
|
|
| Recovery |
|
|
|
| GainLimited to Prior Loss |
|
|
|
There is a write-down to fair value while the assets are held for disposal in Year 1. The loss is computed as the difference between the cost and fair values of the assets.
Machinery: Cost Fair Value =
Equipment: Cost Fair Value =
| Account | End of Year 1 | |
| Loss on Machinery Held for Sale |
|
|
| Machinery |
|
|
|
|
|
|
| Loss on Equipment Held for Sale |
|
|
| Equipment |
|
|
A market recovery occurs in Year 2 and can be recognized while the asset is held for disposal up to the extent of previously reported impairment losses on the asset.
| Account | End of Year 2 | |
| Machinery |
|
|
| Gain on Machine Held for Sale |
|
|
| Equipment |
|
|
| Gain on Equipment Held for Sale |
|
|
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Governmental Accounting Auditing And Financial Reporting
Authors: Stephen J. Gauthier
1st Edition
0891252754, 978-0891252757
