On July 31, 2012, Mexico Company paid 3,000,000 to acquire all of the common sto
ID: 2351187 • Letter: O
Question
On July 31, 2012, Mexico Company paid 3,000,000 to acquire all of the common stock of Conchita Inc., which became a division of Mexico. Conchita reported the following balance sheet at the time of the acquisition.Current assets 800,000 Current liabilities 600,000
Noncurrent assets 2,700,000 Long term liabilities 500,000
Total assets 3,500,000 Stockholders equity 2,400,000
Total liabilities and stockholders equity 3,500,000
It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was 2,750,000. Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31, 2012, Conchita reports the following balance sheet information.
Current assets 450,000
Noncurrent assets (including goodwill recognized in purchase) 2,400,000
current liabilities (700,000)
longterm liabilities (500,000)
net assets 1,650,000
It is determined that the fair value of the Conchita Division is 1,850,000. The recorded amount for Conchita's net assets (excluding goodwill) is the same as fair value except for property, plant, and equipment, which has a fair value of 150,000 above the carrying value.
a) compute the amount of goodwill recognized, if any, on July 31, 2012
b) determine the impairment loss, if any, to be recorded on December 31, 2012
c) assume that fair value of the Conchita Division is 1,600,000 instead of 1,850,000. determine impairment loss, if any, to be recorded on December 31, 2012
d) prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement.
This is the template that I have to use.
Instructions:
(a) Compute the amount of goodwill recognized, if any, on July 31, 2012.
Text as appropriate.
Amount - Amount = Formula
(b) Determine the impairment loss, if any, to be recorded on December 31, 2012.
Enter text answer here.
(c) Assume that fair value of the Conchita Division is $1,600,000 instead of $1,850,000
Determine the impairment loss, if any, to be recorded on December 31, 2012.
Enter text as appropriate.
Text title Amount
Text title Amount
Text title Amount
Less: Account title Amount
Formula
Text title Formula
Text title Amount
Text title Formula
"(d) Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be
reported in the income statement."
Account title Amount
Account title Amount
Enter text answer here.
I guess the reason that I am so confused is I don't know where to put the answers and a class mate said that it is a 25 loss. But on another question answered here it says its 200,000 for the loss. Please help!
Explanation / Answer
(a) Compute the amount of goodwill recognized, if any, on July 31, 2012.
Goodwill = Excess of the cost of the division over the fair value of the identifiable assets
= $3,000,000- $2,750,000 = $250,000
====================
(b) Determine the impairment loss, if any, to be recorded on December 31, 2012.
No impairment loss is recorded, because the fair value of Conchita ($1,850,000) is greater than carrying value of the net assets ($1,650,000). $1,600,000
==============================
(c) Assume that fair value of the Conchita Division is Determine the impairment loss, if any, to be recorded on December 31, 2012. instead of $1,850,000
Implied fair value of goodwill = Fair value of division less the carrying value of the division (adjusted for fair value changes), net of goodwill:
Fair value of Conchita division $1,600,000
Carrying value of division 1,650,000
Increase in fair value of PP&E 150,000
Less: Goodwill (250,000) (1,550,000)
Implied fair value of goodwill 50,000
Carrying value of goodwill (250,000)
Impairment loss ($200,000)
===========================
(d) Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement.
Loss on Impairment Goodwill 200,000 200,000
This loss will be reported in income as a separate line item before the subtotal income from continuing operations.
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