The Three Stooges, Inc. is a conglomerate related to real estate sales and development.  The company has three different divisions - Curly, Larry and Moe.  The real estate market has experienced a recent decline so the conglomerate has decided to test for impairments of its three divisions as well as its goodwill. A summarized balance sheet at December 31, 2021 consists of the following:

 

Assets:

            Cash                                                                         $200,000

            Trading securities                                                      400,000

            Curly assets                                                             1,500,000

            Larry assets                                                             1,800,000

            Moe assets                                                              5,000,000

            Goodwill                                                                 4,000,000

            Total assets                                                         $12,900,000

 

Liabilities and Equity:

            Liabilities - note payable                                     $4,000,000

 

            Equity:

                  Common stock                                                  6,500,000

                  Retained earnings                                             2,400,000

                  Total equity                                                       8,900,000

 

            Total liabilities and equity                                  $12,900,000

 

Some additional information that you may want to consider in your solutions to the questions below includes:

• The trading securities represent a recurring fair value item.  The company has one investment - 10,000 shares of Looney Tunes, Corp.  At December 31, 2021, these shares had a bid of $35 per share and an ask of $37 per share.
• The Curly division consists of 10 one-acre plots of land that are currently being held for the development of family homes. The division has not had any cash flows since the plots were purchased.  Curly expects to sell all ten lots in the next three years.  Research has shown that similar plots in the same region have sold for $110,000 per acre.  Curly anticipates that it will sell 5 plots in 2022, 3 plots in 2023, and the final 2 plots in 2024.  In order to facilitate these sales, Curly will incur operating costs of $50,000 per year. The company's incremental rate of borrowing is 5%.  The market rate of interest for developments of this type is 18%.  It should be noted that a large, mean oil company has recently purchased land in the same county in hopes of expanding its fracking activities. This oil company has purchased land similar to Curly's holdings at $180,000 per acre.  If sold to the oil company, all acres would be sold at one point in time. While this price is higher than the amount received for selling these lots for family homes, Curly division executives have made it clear that they have no intention of selling its lots to a disgusting oil company.
• The Larry division operates the real estate brokerage activities - i.e. working with clients to buy/sell existing real estate (like a Century 21 office).  The company had net income of $80,000 in 2021 and cash flows of $100,000.  The company anticipates similar results for the foreseeable future.  The assets of this division have a remaining useful life of 15 years.  The company's incremental borrowing rate is 5%.  The market rate of interest for similar businesses is 8%.  In addition, Larry's management has observed two recent sales of similar businesses (Abbott and Costello).  It appears that the market focuses on an earnings multiple when determining selling price.  Abbott had net income of $60,000 and sold for $1,080,000.  Costello had net income of $70,000 and sold for $1,540,000.
• Assets of the Moe Division consists of construction equipment that the division rents to contractors to use in developing real estate.  This company has experienced losses in the last three years, but after adding back depreciation, cash flows are breakeven.  Similar results are expected in the foreseeable future.  Occasionally, this division has sold its assets to raise some cash.  In these circumstances, the company has three markets to choose from: Dealer, Retail and Construction.  The fair value estimates of Moe's equipment in these three markets are as follows:
• Dealer - $4,700,000
• Retail - $5,500,000
• Construction - $4,800,000

The Dealer market is the dominant market for such sales as it accounts for 80% of similar asset sales.  The Retail market accounts for 8%, and the Construction market accounts for 12%.  In previous years, Moe has always used the Retail market when selling its assets. Moe's executives assure you (they even give you a "pinky-swear") that the division would use the Retail market for any future asset sales.

 

Finally, the CEO of The Three Stooges, Inc. recently hired a Certified Valuation Analyst to estimate the value of the entity as whole. This analyst estimated the fair value of the conglomerate's net assets at $7,000,000.

 Required:

1. Determine fair value estimates for the trading securities and each of the three divisions.  Show computations and briefly discuss the processes you used and any assumptions you made in the process.  You should have two fair value estimates for both the Curly and Larry divisions.
2. 
   
3. For each fair value estimate above, determine the level of the fair value hierarchy where the estimate would be classified.
4. 
   
5. For each of the fair value estimates of the divisions, determine if you used the market approach, income approach, or cost approach.
6. 
   
7.  an impairment test for each of the three divisions.  Be sure to show both steps.  Also, for those divisions that have multiple estimates of fair value, be sure to discuss the process of choosing one of the values and WHY you chose the fair value measurement used in the computations.
8. 
   
9.  any required journal entries for trading securities and/or impairment of the divisions.
10. 
    
11.  an impairment test for goodwill and determine if an impairment needs to be recorded.