On July 31, 2014, Mexico Company paid $3,065,200 to acquire all of the common st

Question

On July 31, 2014, Mexico Company paid $3,065,200 to acquire all of the common stock of Conchita Incorporated, which became a division of Mexico. Conchita reported the following balance sheet at the time of the acquisition.

Current assets $896,800 Current liabilities $653,400 Noncurrent assets 2,739,000 Long-term liabilities 557,800    Total assets $3,635,800 Stockholders On July 31, 2014, Mexico Company paid $3,065,200 to acquire all of the common stock of Conchita Incorporated, which became a division of Mexico. Conchita reported the following balance sheet at the time of the acquisition. It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was $2,779,600. 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, 2014, Conchita reports the following balance sheet information. It is determined that the fair value of the Conchita Division is $1,851,200. 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 $156,700 above the carrying value. Assume that fair value of the Conchita Division is $1,595,100 instead of $1,851,200. Determine the impairment loss, if any, to be recorded on December 31, 2014.

Explanation / Answer

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 $1,595,100

Carrying value of division 1,646,100


Increase in fair value of PP&E 156,700


Less: Goodwill (285,600)



(1,517,200)

Implied fair value of goodwill 77,900

Carrying value of goodwill (285,600)

Impairment loss ($207,700)

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