The Eaton Manufacturing Company decided to expand further by purchasing the Ball
ID: 2592479 • Letter: T
Question
The Eaton Manufacturing Company decided to expand further by purchasing the Ball Company. The balance sheet of Ball Company as of December 31, 2013 was as follows:
Ball Company
Balance Sheet 12/31/13
Assets
Liabilities & Equity
Cash
$ 212,500
Accounts payable
$ 325,000
Receivables
450,000
Common stock
800,000
Inventory
275,000
Retained earnings
837,500
Plant assets (net)
1,025,000
Total assets
$1,962,500
Total equities
$1,962,500
An appraisal, agreed to by the parties, indicated that the book values and fair market values of the net assets were the same except for inventory which had a fair market value of $350,000 and the plant assets which had a fair market value of $1,225,000. The agreed purchase price was $2,100,000, and this amount was paid in cash.
Shortly after the acquisition, the newly acquired Company (a reporting unit) started experiencing operating losses due to unexpected competition which will continue. At December 31, 2014, the book value of the reporting unit was $2,000,000, the fair value of the reporting unit was $1,900,000 and the fair value of the identifiable net assets within the reporting unit were $1,800,000.
REQUIRED:
Determine the amount of goodwill in the purchase price of $2,100,000.
Determine the impairment loss (if any) to be recorded on December 31, 2014.
Assets
Liabilities & Equity
Cash
$ 212,500
Accounts payable
$ 325,000
Receivables
450,000
Common stock
800,000
Inventory
275,000
Retained earnings
837,500
Plant assets (net)
1,025,000
Total assets
$1,962,500
Total equities
$1,962,500
Explanation / Answer
1….. Book value Fair Value Cash 212,500 212500 Receivables 450000 450000 Inventory 275000 350000 Plant assets (net) 1025000 1225000 Total assets 1962500 2237500 Less: Accounts payables 325000 325000 Net assets acquired 1637500 1912500 Purchase price 2100000 So, amount of Goodwill,in the purchase price , at acquisition=2100000-1912500= 187500 2….Impairment loss (if any) to be recorded on December 31, 2014 Fair value (1900000)of the reporting unit is less than its carrying value (1912500) in the balance sheet. So, Fair value of the reporting unit 1900000 Less: Fair value of the reporting unit's net identifiable assets 1800000 New goodwill 100000 So, impairment in goodwill= Goodwill at acquisition-New good will= 187500-100000= 87500
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