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).

On January 1, Prine, Inc., acquired 100 percent of Lydia Company's common stock for a fair value of $126,079,500 in cash and stock. Lydia's assets and liabilities equaled their fair values except for its equipment, which was undervalued by $525,000 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 Lydia's artistic content (a large library of classic movies) and its sports programming specialty video operation. Accordingly, Prine allocated Lydia's assets and liabilities (including $53,237,500 of goodwill) to a newly formed operating segment appropriately designated as a reporting unit. The fair values of the reporting unit's identifiable assets and liabilities through the first year of operations were as follows. Fair Values Account 1/1 Cash $ 232,000 $ 687,000 Receivables (net) 575, 000 917,500 Movie library (25-year remaining life) 41,850,000 63,910,000 Broadcast licenses (indefinite remaining life) 15,600,000 20,530,000 Equipment (10-year remaining life) 21,170,000 19,550,000 Current liabilities (545,000) (717,500) Long-term debt (6,040,000) (6,250,000) 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 $116,117,000. At December 31, Prine and Lydia submitted the following balances for consolidation. There were no intra-entity payables on that date. 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 $116,117,000. At December 31, Prine and Lydia submitted the following balances for consolidation. There were no intra-entity payables on that date. Lydia Co. $ (16,900,000) 16,000,000 Prine, Inc. $ (20,100,000) 13,200,000 ( 847,500) 100,000 (59,600,000) 100,500 457,500 126, 807,000 505,000 435,000 142,100,000 (857,500) (27,300,000) (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 120,000 (4,817,000) 687,000 917,500 14,110,000 46,500,000 18,900,000 (457,500) (7,560,000) (67,500,000) On January 1, Prine, Inc., acquired 100 percent of Lydia Company's common stock for a fair value of $126,079,500 in cash and stock. Lydia's assets and liabilities equaled their fair values except for its equipment, which was undervalued by $525,000 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 Lydia's artistic content (a large library of classic movies) and its sports programming specialty video operation. Accordingly, Prine allocated Lydia's assets and liabilities (including $53,237,500 of goodwill) to a newly formed operating segment appropriately designated as a reporting unit. The fair values of the reporting unit's identifiable assets and liabilities through the first year of operations were as follows. Fair Values Account 1/1 Cash $ 232,000 $ 687,000 Receivables (net) 575, 000 917,500 Movie library (25-year remaining life) 41,850,000 63,910,000 Broadcast licenses (indefinite remaining life) 15,600,000 20,530,000 Equipment (10-year remaining life) 21,170,000 19,550,000 Current liabilities (545,000) (717,500) Long-term debt (6,040,000) (6,250,000) 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 $116,117,000. At December 31, Prine and Lydia submitted the following balances for consolidation. There were no intra-entity payables on that date. 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 $116,117,000. At December 31, Prine and Lydia submitted the following balances for consolidation. There were no intra-entity payables on that date. Lydia Co. $ (16,900,000) 16,000,000 Prine, Inc. $ (20,100,000) 13,200,000 ( 847,500) 100,000 (59,600,000) 100,500 457,500 126, 807,000 505,000 435,000 142,100,000 (857,500) (27,300,000) (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 120,000 (4,817,000) 687,000 917,500 14,110,000 46,500,000 18,900,000 (457,500) (7,560,000) (67,500,000)