Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
36. (20 Minutes) (Consolidated balances three years after acquisition. Parent
has applied the equity method.)
a. Schedule 1—Acquisition-Date Fair Value Allocation and Amortization
Jasmine’s acquisition-date fair value $206,000
Excess fair value assigned to specific
accounts based on individual fair values Remaining Annual excess
life amortization
Equipment ................................ $54,400 8 yrs. $6,800
Buildings (overvalued) ........... (10 ,000) 20 yrs. (500)
Goodwill ................................... $21 ,600 indefinite -0 -
Total ............................................. $6 ,300
Investment in Jasmine Company—12/31/15:
Jasmine’s acquisition-date fair value............................. $206,000
2013 Increase in book value of subsidiary ................... 40,000
36. (continued)
b. Equity in subsidiary earnings:
Income accrual.................................................................. $30,000
c. Consolidated net income:
Consolidated revenues (add book values) ................... $414,000
Consolidated expenses (add book values) ................... (272,000)
d. Consolidated equipment:
Book values added together ........................................... $370,000
e. Consolidated buildings:
Book values added together ........................................... $288,000
f. Allocation of excess fair value to goodwill.................... $21 ,600
g. Consolidated common stock........................................... $290 ,000
The parent's $290,000 balance appropriately shows the parent company
h. Consolidated retained earnings...................................... $410 ,000
Tyler's balance of $410,000 is equal to the consolidated total because
the equity method has been applied.
37. (35 minutes) (Consolidation with IPR&D, equity method)
a. Consideration transferred 1/1/14 $1,765,000
Increase in Salsa’s retained earnings to 1/1/15 150,000
37. (continued)
b. The IPR&D was abandoned in 2014 and the original asset was written off to
c. Picante and Subsidiary Salsa
Consolidated Worksheet
for the year ended December 31, 2015
12/31/15 12/31/15
Accounts Picante Salsa Adjustments Consolidated
Sales (3,500,000) (1,000,000) (4,500,000)
Cost of goods sold 1,600,000 630,000 2,230,000
Depreciation expense 540,000 160,000 (E) 7,000 707,000
Subsidiary income (203 ,000) (I) 203,000 - 0 -
Net Income (1 ,563,000) (210 ,000) (1 ,563,000)
Retained earnings 1/1/15 (3,000,000) (800,000) (S) 800,000 (3,000,000)
Inventory 900,000 580,000 1,480,000
Investment in Salsa 2,042,000 (D) 25,000 (S)1,800,000 -0-
(A) 64,000
(I) 203,000
Land 3,500,000 700,000 4,200,000
Common stock—Picante (5,150,000) (5,150,000)
Common stock—Salsa (1,000,000) (S)1,000,000
Retained earnings 12/31/15 (4 ,363,000) (985 ,000) (4 ,363,000)
(12 ,800,000) (3 ,185,000) 2 ,099,000 2 ,099,000 (14 ,000,000)
38. (55 minutes) (Goodwill impairment, consolidated balances, and worksheet)
a. Prine compares Lydia’s total fair value to its carrying value, as follows:
12/31 Carrying value (equity method balance) $120,070,000
Because fair value is less than carrying value, Prine is required to
further test whether goodwill is impaired.
b. 12/31 Fair value for Lydia $110,000,000
Fair values of assets and liabilities
Cash $109,000
Receivables (net) 897,000
Movie library 60,000,000
Broadcast licenses 20,000,000
Equipment 19,000,000
Current liabilities (650,000)
Journal Entry by Prine:
Goodwill impairment loss 33,106,000
Investment in Lydia Co. 33,106,000
c. Combined revenues $30,000,000
Combined expenses (including excess amortization) 22 ,200,000
Consolidated net loss $(25 ,306,000)
d. Consolidated goodwill = $50,000,000 – $33,106,000 = $16,894,000
e. Consolidated broadcast licenses = $350,000 + $14,014,000 = $14,364,000
The consolidated balance is the parent’s book value plus the fair value
of the subsidiary acquisition-date value adjusted for changes since
38. f. (continued) Prine and Lydia
Consolidated Worksheet
December 31
Adjusting Entries Consolidated
Accounts Prine, Inc. Lydia Co. Debit Credit Totals
Revenues (18,000,000) (12,000,000) (30,000,000)
Expenses 10,350,000 11,800,000(E) 50,000 22,200,000
Equity in Lydia earnings (150,000) -0- (I) 150,000 -0-
Impairment loss 33 ,106,000
-0 - 33,106,000
Dividends declared 300,000 80,000 (D) 80,000 300,000
Net loss (income) 25 ,306,000 (200 ,000) 25 ,306,000
Retained earnings 12/31 (26 ,394,000) (2 ,120,000) (26 ,394,000)
Broadcast licenses 350,000 14,014,000 14,364,000
Movie library 365,000 45,000,000 45,365,000
Equipment (net) 136,000,000 17,500,000(A) 500,000(E) 50,000 153,950,000
Goodwill -0- -0- (A)16,894,000 16 ,894,000
Total assets 224 ,149,000 77 ,520,000 232 ,049,000
Total liabilities and equity (224 ,149,000)(77,520,000)87,114,000 87 ,114,000
(232 ,049,000)
RESEARCH CASE SOLUTION
Jonas recognized several identifiable intangibles from its acquisition of
Innovation Plus. Jonas expresses the desire to expense these intangible assets
in the acquisition period.
1. Advise Jonas on the acceptability of its suggested immediate write-off.
2. Indicate the relevant factors to consider in allocating the values assigned to
identifiable intangibles acquired in a business combination.
The accounting for a recognized intangible asset is based on its useful life to
the reporting entity. An intangible asset with a finite useful life is amortized;
an intangible asset with an indefinite useful life is not amortized. The useful
life of an intangible asset to an entity is the period over which the asset is
expected to contribute directly or indirectly to the future cash flows of that
3. Jonas’ suggested treatment of goodwill is inappropriate. To ensure that
4. Per the FASB ASC (350-20-35-41):
For the purpose of testing goodwill for impairment, all goodwill acquired in a
business combination shall be assigned to one or more reporting units as of
the acquisition date. Goodwill shall be assigned to reporting units of the
MICROSOFT IMPAIRMENT ANALYSIS CASE SOLUTION
The following all can be found in Microsoft Corporation’s 2012 10-K annual report.
1. Microsoft’s OnOnline Services Division incurred a $6.193 billion goodwill
impairment loss assess on May 1, 2012
Online Services Division (“OSD”) develops and markets information and
content designed to help people simplify tasks and make more informed
2. Goodwill impairment appeared on the 2012 income statement and cash flow
statement as follows:
3. The impairment was the result of the OSD unit experiencing slower than
projected growth in search queries and search advertising revenue per query,
slower growth in display revenue, and changes in the timing and
implementation of certain initiatives designed to drive search and display
4. Microsoft’s Note 10 - Goodwill (page 64) states the following:
We tested goodwill for impairment as of May 1, 2012 at the reporting unit level
using a discounted cash flow methodology with a peer-based, risk-adjusted
weighted average cost of capital. We believe use of a discounted cash flow
approach is the most reliable indicator of the fair values of the businesses.
capital used to calculate the discounted cash flows of OSD in estimating the
fair value of the business. This business-specific risk factor reflects the
increased uncertainty in forecasting the future performance of OSD.
Because our annual test indicated that OSD’s carrying value exceeded its
estimated fair value, a second phase of the goodwill impairment test (“Step 2”)
was performed specific to OSD. Under Step 2, the fair value of all OSD assets
FASB ASC AND IASB RESEARCH CASE
1. GAAP prohibits reversal of impairment losses for goodwill. IFRS also
prohibits reversal of impairment losses for goodwill
2. Requirements for goodwill impairment differ under IFRS. Under IFRS, goodwill
impairment testing uses a one-step approach: The recoverable amount of the
CGU (cash-generating unit) or group of CGUs (i.e., the higher of its fair value
IAS 36 Impairment of Assets:
88. When, as described in paragraph 81, goodwill relates to a cash-generating
unit but has not been allocated to that unit, the unit shall be tested for
90. A cash-generating unit to which goodwill has been allocated shall be
tested for impairment annually, and whenever there is an indication that the
104. An impairment loss shall be recognised for a cash-generating unit (the
smallest group of cash-generating units to which goodwill or a corporate
asset has been allocated) if, and only if, the recoverable amount of the unit
(group of units) is less than the carrying amount of the unit (group of units).
The impairment loss shall be allocated to reduce the carrying amount of the
assets of the unit (group of units) in the following order:
Excel Case 1 Solution
a. Innovus employs initial value method to account for ChipTech.
Innovus ChipTech Adjustments Consolidated
Net Income (375,000) (97,000) (412,000)
Retained earnings 1/1 (1,555,000) (450,000) (S)450,000 (*C) 60,000 (1,615,000)
Net income (375,000) (97,000) (412,000)
Dividends declared 250,000 40,000 (I) 40,000 250,000
Retained earnings 12/31 (1,680,000) (507,000) (1,777,000)
Trademark 235,000 100,000 (A) 36,000 (E) 4,000 367,000
Existing technology 0 45,000 (A) 64,000 (E) 16,000 93,000
Goodwill 450,000 -0- (A) 50,000 500,000
Total assets 3,080,000 725,000 3,265,000
Liabilities (780,000) (88,000) (868,000)
b. Innovus employs initial value method to account for ChipTech and goodwill is
impaired.
Innovus ChipTech Consolidated
Revenues (990,000) (210,000) (1,200,000)
Cost of good sold 500,000 90,000 590,000
Retained earnings 1/1 (1,555,000) (450,000) (S)450,000 (*C) 60,000 (1,615,000)
Net income (325,000) (97,000) (362,000)
Dividends declared 250,000 40,000 (I) 40,000 250,000
Retained earnings 12/31 (1,630,000) (507,000) (1,727,000)
Current assets 960,000 355,000 1,315,000
Existing technology -0- 45,000 (A )64,000 (E) 16,000 93,000
Goodwill 450,000 -0- 450,000
Total assets 3,030,000 725,000 3,215,000
Liabilities (780,000) (88,000) (868,000)
Common stock (500,000) (100,000) (S)100,000 (500,000)
Alternatively, the goodwill impairment loss could have been recognized as an
adjustment on the worksheet.
Excel Case 2 Solution
Part a: Investment in Wi-Free account balance 12/31/15
Wi-Free’s acquisition-date fair value $730,000
2015 amortization (4 ,500)
Balance 12/31/15 $856 ,000
Part b: Consolidation Entries Consolidated
Hi-Speed Wi-Free Debit Credit
Totals
earnings (175,500) -0- (I)175,500 -0-
Net Income (460,500) (180,000) (460,500)
Retained earnings 1/1 (1,552,500) (450,000) (S)450,000 (1,552,500)
Net income (460,500) (180,000) (460,500)
Dividends declared 250,000 50,000 (D) 50,000 250,000
Equipment (net) 713,000 305,000 1,018,000
Computer software 650,000 130,000 (E) 7,500 (A) 22,500 765,000
Internet domain name 0 100,000 (A)108,000 (E) 12,000 196,000
Goodwill -0- -0- (A) 65,000 65,000
Total assets 3,253,000 880,000 3,393,000
