<p>On July 31, 2010, Mexico Company paid $3,000,000 to acquire all of the common

Question

<p>On July 31, 2010, Mexico Company paid $3,000,000 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.<br /><br />Current Assets $800,000 <br />Noncurrent Assets $2,700,000</p>
<p>Total Assets $3,500,000</p>
<p>Current Liabilities $600,000</p>
<p>Long Term Liabilities $500,000</p>
<p>Stockholder's Equity $2,400,000</p>
<p>Total Liabilities and Stockholder's Equity $3,500,000</p>
<p>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, 2010, Conchita reports the following balance sheet information.&#160;</p>
<p>Current Assets $450,000</p>
<p>Noncurrent assets (including goodwill recognized in purchase) $2,400,000</p>
<p>Current Liabilities ($700,000)</p>
<p>Long Term Liabilities ($500,000)</p>
<p>Net Assets $1,650,000</p>
<p>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 $150,000 above the carrying value.&#160;</p>
<p>&#160;</p>
<p>(a) compute the amount of goodwill recognized, if any on July 31st, 2010</p>
<p>(b)Determine the impairment loss, if any, to be recorded on December 31st, 2010</p>
<p>(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, 2010</p>
<p>(d) Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement.&#160;</p>

Explanation / Answer

a) Goodwill= 3,000,000-2,750,000=250,000 b) No impairment loss is recognized (Fair value 1,850,000>1,650,000Carrying value) c) Net identif assets=1,650,000+150,000-250,000)=1,550,000 Computation of imparement Fair value 1,600,000 Less Net Id Assets (1,550,000) Implied Goodwill 50,000 Carrying value of Goodwill 250,000 Less Implied Goodwill (50,000) Loss on impairment 200,000 d) Loss on impairment 200,000 debit Goodwill 200,000 credit Loss on impairment reported under "income from continuing operations" in income statement.

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