Ch 4 SOL.docx

CHAPTER 4 SOLUTIONS TO MULTIPLE MULTIPLE CHOICE QUESTIONS, EXERCISES AND PROBLEMS

MULTIPLE MULTIPLE CHOICE QUESTIONS

1.

b Goodwill at the date of acquisition is $10,000,000 ( = $16,000,000 – 4,000,000 + 8,000,000 – 10,000,000). Goodwill at 1114 1114 is $10,000,000 – !,000,000 = $8,000,000. "and, buildin#s and equi%ent &e'aluation at 1114 is a c&edit of $8,000,000 –  * (8,000,000!0) = $(6,800,000). ntan#ibles &e'aluation at 1114 = $10,000,000 –  * ($10,000,000-) = $4,000,000. li%inatin# ent&/  is as follows Goodwill

8,000,00 0 4,000,00 0

dentifiable intan#ibles "and, buildin#s and equi%ent n'est%ent in 2ale% !.

b li%inatin# ent&/ 3 is as follows 3e&atin# e*enses

!,100,00 0 40 0 ,00 0

"and, buildin#s and equi%ent Goodwill dentifiable intan#ibles .

6,800,000 -,!00,000

-00,000 !,000,000

a alculation of quit/ in 5et nco%e 2ale%s &eo&ted net inco%e e'aluation w&iteoffs "and, buildin buildin#s and equi%ent de&eciation dentifiable intan#ibles a%o&ti7ation Goodwill i%ai&%ent loss quit/ in inco%e of 2ale%

Solutions Manual, Chapter 4

$ !,-00,000 400,000 (!,000,000) (-00,000) $ 400,000

©Cambridge Business Publishers, 2013 1

4.

c 3&i#inal cost han#e in 2ale%s &etained ea&nin#s to 1114  /ea&s land, buildin#s and equi%ent de&eciation  /ea&s identifiable intan#ibles a%o&ti7ation Goodwill i%ai&%ent loss to 1114 n'est%ent balance, 1114 quit/ in net inco%e, !014 n'est%ent balance, 1!114

-.

c

oo9 'alue : undiscounted cash flows; ai& 'alue oo9 'alue %ai&%ent loss 6.

Customer lists 5o

>>

Bra! ames
d

2te one ?i'ision boo9 'alue : fai& 'alue; 2te two ai& 'alue of #oodwill oo9 'alue of #oodwill %ai&%ent loss

@.

$ 16,000,000 14,000,000 1,!00,000 (6,000,000) (!,000,000) !,!00,000 400,000 $!,600,000

Di"isio #
Di"isio $
$1,000,000 1,600,000 $ 600,000

$8,000,000 6,400,000 >0>

Di"isio # $14,000,000 16,000,000 !,000,000 $ 1,600,000

Di"isio $ $!0,000,000 !4,000,000 4,000,000 $ 4,000,000

c

ai& 'alue of di'ision oo9 'alue of di'ision Aotential #oodwill i%ai&%ent Bctual i%ai&%ent loss


Advaned Aounting, 2nd !dition

4.

c 3&i#inal cost han#e in 2ale%s &etained ea&nin#s to 1114  /ea&s land, buildin#s and equi%ent de&eciation  /ea&s identifiable intan#ibles a%o&ti7ation Goodwill i%ai&%ent loss to 1114 n'est%ent balance, 1114 quit/ in net inco%e, !014 n'est%ent balance, 1!114

-.

c

oo9 'alue : undiscounted cash flows; ai& 'alue oo9 'alue %ai&%ent loss 6.

Customer lists 5o

>>

Bra! ames
d

2te one ?i'ision boo9 'alue : fai& 'alue; 2te two ai& 'alue of #oodwill oo9 'alue of #oodwill %ai&%ent loss

@.

$ 16,000,000 14,000,000 1,!00,000 (6,000,000) (!,000,000) !,!00,000 400,000 $!,600,000

Di"isio #
Di"isio $
$1,000,000 1,600,000 $ 600,000

$8,000,000 6,400,000 >0>

Di"isio # $14,000,000 16,000,000 !,000,000 $ 1,600,000

Di"isio $ $!0,000,000 !4,000,000 4,000,000 $ 4,000,000

c

ai& 'alue of di'ision oo9 'alue of di'ision Aotential #oodwill i%ai&%ent Bctual i%ai&%ent loss



8.

d

ai& 'alue oo9 'alue %ai&%ent loss C.

a

10.

a

Customer lists $1,!00,000 1,-00,000 $ 00,000

Bra! ames $,400,000 -,!00,000 $1,800,000

$-00,000 – 100,000 = $400,000.



EXERCISES E4%# E4%#

E&ui E& uit' t' Met Met(o (o! ! A)) A))ou out ti i* *

alculation of quit/ in 5et nco%e Dohnsons &eo&ted net inco%e e'aluation w&iteoffs Alant assets $-0,000,000!Goodwill i%ai&%ent loss quit/ in net inco%e of Dohnson nt&ies %ade b/ Geo&#e du&in# !01 n'est%ent in Dohnson aital stoc9

n'est%ent in Dohnson

$ 8-,000,000 (!,000,000) (!0,000,000) $ 6,000,000

-00,000,000 -00,000,00 0 6,000,000

quit/ in net inco%e of Dohnson ash

6,000,000 0,000,000

n'est%ent in Dohnson

E4%$

0,000,000

E&uit' E&uit' Met(o! Met(o! I)ome I)ome a! a! + +or ori i* * Pa-er Pa-er Elimia Elimiatio tioss

(all amounts in millions)

a.

n'est%ent balance, 1114 n'est%ent balance, 111 = $!,000 + $!00 han#e !01 di'idends !01 equit/ inco%e acc&ual E&iteoff of lant asset &e'aluation = ($16010) 2abe&s !01 net inco%e

$!,!86 !,!00 86 60 146 16 $ 16 !

b.

2abe&s stoc9holde&s equit/, 111 111 !01 net inco%e !01 di'idends 2abe&s stoc9holde&s equit/, 1114

$!,000 16 ! (60) $!,10!

c.

2abe&s !014 net inco%e *t&a de&eciation on &e'alued lant assets quit/ inco%e acc&ual

$ 10 (16) $ 114



d.

() quit/ inco%e acc&ual

114 ?i'idends – 2abe& n'est%ent in 2abe&

() 2toc9holde&s quit/ – 2abe&

40 @4

!,10! n'est%ent in 2abe&

!,10!

() Alant assets, net Goodwill

144 40 n'est%ent in 2abe&

184

(3) ?e &eciation e*ense

16 Alant assets, net

e.

16

Bt the be#innin# of !0!-, the lant assets a&e full/ de&eciated and the &e%ainin# balance fo& #oodwill is $40 > $0 = $10. () Goodwill

10 n'est%ent in 2

10

nt&/ (3) is not needed since no &e'aluations a&e w&itten off in !0!-.


©Cambridge Business Publishers, 2013 "

E4%.

a.

Cosoli!atio at E! o/ 0irst 1ear

Fhe acquisition ent&/ is as follows n'est%ent in 2addlestone e&#e& e*enses

10,00,000 !-0,000 aital stoc9

10,000,00 0

ontin#ent conside&ation liabilit/ ash

00,000 !-0,000

alculation of !01 equit/ in net inco%e 2addlestones &eo&ted net inco%e e'aluation w&iteoff dentifiable intan#ibles $!,000,000quit/ in net inco%e of 2addlestone Aea9s equit/ %ethod ent&ies fo& !01 n'est%ent in 2addlestone quit/ in net inco%e of 2addlestone ash

$ ,000,000 (400,000) $ !,600,000

!,600,000 !,600,000 1,000,000

n'est%ent in 2addlestone

b.

alculation of #oodwill is as follows Bcquisition cost oo9 'alue of 2addlestone *cess of acquisition cost o'e& boo9 'alue dentifiable intan#ibles Goodwill onsolidation wo&9in# ae& eli%inatin# ent&ies fo& !01 () quit/ in net inco%e of 2addlestone ?i'idends – 2addlestone n'est%ent in 2addlestone () 2toc9holde&s equit/H 2addlestone, 11

$ 10,00,000 (@,!00,000) ,100,000 (!,000,000) $ 1,100,000

!,600,000 1,000,000 1,600,000

@,!00,000 n'est%ent in 2addlestone

©Cambridge Business Publishers, 2013 #

1,000,000

@,!00,000


E4%.

)otiue!

() dentifiable intan#ibles Goodwill

!,000,000 1,100,000 n'est%ent in 2addlestone

,100,000

(3) B%o&ti7ation e*ense

400,000 dentifiable intan#ibles

E4%4

Elimiati* Etries a/ter 0irst a! Se)o! 1ears

a.

alculation of equit/ in net inco%e fo& !014

400,000

2afecos &eo&ted net inco%e e'aluation w&iteoffs qui%ent $-00,000n'ento&/ Goodwill i%ai&%ent loss quit/ in net inco%e of 2afeco

$ 1,600,000 (100,000) (!00,000) (-0,000) $ 1,!-0,000

Aee&lesss ent&ies fo& !014 n'est%ent in 2afeco

8,000,000 ash

8,000,000

n'est%ent in 2afeco

1,!-0,000 quit/ in net inco%e of 2afeco

1,!-0,000

ash

600,000 n'est%ent in 2afeco

600,000

alculation of #oodwill is as follows Bcquisition cost oo9 'alue of 2afeco *cess of acquisition cost o'e& boo9 'alue ai& 'alue less boo9 'alue qui%ent n'ento&/ Goodwill


$

$

-00,000 !00,000 $

8,000,000 (@,000,000) 1,000,000

(@00,000) 00,000

©Cambridge Business Publishers, 2013 $

E4%4

)otiue!

onsolidation wo&9in# ae& eli%inatin# ent&ies fo& !014 () quit/ in net inco%e of 2afeco

1,!-0,000 ?i'idends – 2afeco n'est%ent in 2afeco

600,000 6-0,000

() 2toc9holde&s equit/H2afeco, 11

@,000,000 n'est%ent in 2afeco

@,000,000

() qui%ent, net n'ento&/ Goodwill

-00,000 !00,000 00,000 n'est%ent in 2afeco

1,000,000

(3) ?e&eciation e*ense ost of #oods sold Goodwill i%ai&%ent loss

100,000 !00,000 -0,000 qui%ent, net n'ento&/ Goodwill

b.

100,000 !00,000 -0,000

alculation of equit/ in net inco%e fo& !01- 2afecos &eo&ted net inco%e e'aluation w&iteoff qui%ent $-00,000quit/ in net inco%e of 2afeco

$ !,000,000 (100,000) $ 1,C00,000

Aee&lesss equit/ %ethod ent&ies fo& !01- n'est%ent in 2afeco

1,C00,000 quit/ in net inco%e of 2afeco

ash

800,000 n'est%ent in 2afeco

©Cambridge Business Publishers, 2013 %

1,C00,000

800,000


E4%4

)otiue!

Fhe n'est%ent in 2afeco balance at ?ece%be& 1, !01- is $8,000,000 + 1,!-0,000 – 600,000 + 1,C00,000 – 800,000 = $C,@-0,000. onsolidation wo&9in# ae& eli%inatin# ent&ies fo& !01- () quit/ in net inco%e of 2afeco

1,C00,000 ?i'idends – 2afeco n'est%ent in 2afeco

() 2toc9holde&s equit/H2afeco, 11

800,000 1,100,000

8,000,000

n'est%ent in 2afeco 8,000,000 2toc9holde&s equit/H2afeco at 11!01- = $@,000,000 + 1,600,000 – 600,000 = $8,000,000 () qui%ent, net Goodwill

400,000 !-0,000 n'est%ent in 2afeco

(3) ?e&eciation e*ense

100,000 qui%ent, net


6-0,000

100,000

©Cambridge Business Publishers, 2013 &

E4%2

E&uit' Met(o!, Elimiati* Etries, Se"eral 1ears a/ter A)&uisitio

a.

alculation of total #oodwill is as follows Bcquisition cost oo9 'alue of 3slo *cess of acquisition cost o'e& boo9 'alue ai& 'alue less boo9 'alue "and uildin#s dentifiable intan#ibles "on#>te&% debt Goodwill

b.

$

4-0,000 (400,000) 1,000,000 !-0,000

6,000,000 (!,-00,000) ,-00,000

(1,00,000) $ !,!00,000

alculation of quit/ in net inco%e fo& !014 3slos &e o&ted net inco%e e'aluation w&iteoffs uildin#s $(400,000)!0 "on#>te&% debt $!-0,00010 Goodwill i%ai&%ent loss quit/ in net inco%e of 3slo

c.

$

$ 4-0,000 !0,000 (!-,000) (60,000) $ 8-,000

alculation of n'est%ent in 3slo, 1!114 n'est%ent in 3slo, 1106 3slos &eo&ted inco%e, !006>!01 3slos &eo&ted di'idends, !006>!01 e'aluation w&iteoffs, !006>!01 uildin#s $(400,000)!0 * 8 dentifiable intan#ibles (full balance) "on#>te&% debt $!-0,00010 * 8 Goodwill i%ai&%ent loss n'est%ent in 3slo, 1114 quit/ in net inco%e, !014 3slos di'idends, !014 n'est%ent in 3slo, 1!114


$ 6,000,000 4,000,000 (1,!00,000) 160,000 (1,000,000) (!00,000) (00,000) @,460,000 8-,000 (100,000) $ @,@4-,000


E4%2

)otiue!

d.

onsolidation wo&9in# ae& eli%inatin# ent&ies fo& !014 () quit/ in net inco%e of 3slo

8-,000 ?i'idends – 3slo n'est%ent in 3slo

() 2toc9holde&s equit/H3slo, 11

100,000 !8-,000

-,00,000

n'est%ent in 3slo -,00,000 2toc9holde&s equit/, Danua&/ 1, !014 = $!,-00,000 + 4,000,000 – 1,!00,000 = $-,00,000. () "and "on#>te&% debt Goodwill

4-0,000 -0,000 1,C00,000

n'est%ent in 3slo !,160,000 uildin#s, net !40,000 e'aluations at Danua&/ 1, !014 = o&i#inal &e'aluations less w&iteoffs fo& !006>!01. (3) nte&est e*ense uildin#s, net Goodwill i%ai&%ent loss

!-,000 !0,000 60,000 "on#>te&% debt ?e&eciation e*ense Goodwill


!-,000 !0,000 60,000


E4%3

Cosoli!atio a/ter Se"eral 1ears

alculation of total #oodwill is as follows Bcquisition cost oo9 'alue of a9e& *cess of acquisition cost o'e& boo9 'alue ai& 'alue less boo9 'alue uildin#s Goodwill

$

@,-00,000 (-,000,000) !,-00,000

(1,000,000) $ 1,-00,000

alculation of equit/ in net inco%e fo& !01 a9e&s &eo&ted net inco%e e'aluation w&iteoffs uildin#s $1,000,000!Goodwill i%ai&%ent loss quit/ in net inco%e of a9e&

$

00,000

$

(40,000) (100,000) 160,000

alculation of in'est%ent balance at ?ece%be& 1, !01 n'est%ent in a9e&, 1!106 a9e& &e o&ted inco%e, !00@>!01! a9e& &eo&ted di'idends, !00@>!01! e'aluation w&iteoffs, !00@>!01! uildin#s ($1,000,000!-) * 6 n'est%ent in a9e&, 111 quit/ in net inco%e, !01 ?i'idends, !01 n'est%ent in a9e&, 1!11

$ @,-00,000 1,00,000 (400,000) (!40,000) 8,160,000 160,000 (100,000) $ 8,!!0,000

onsolidation wo&9in# ae& eli%inatin# ent&ies fo& !01 () quit/ in net inco%e of a9e&

160,000 ?i'idends – a9e& n'est%ent in a9e&

() 2toc9holde&s equit/Ha9e&, 11

100,000 60,000

-,C00,000

n'est%ent in a9e& -,C00,000 2toc9holde&s equit/, Danua&/ 1, !01 = $-,000,000 + 1,00,000 – 400,000 = $-,C00,000.



E4%3

)otiue!

() uildin#s, net Goodwill

@60,000 1,-00,000

n'est%ent in a9e& !,!60,000 e'aluations at Danua&/ 1, !01 = o&i#inal &e'aluations less w&iteoffs fo& !00@>!01!. (3) ?e&eciation e*ense Goodwill i%ai&%ent loss

40,000 100,000 uildin#s, net Goodwill

40,000 100,000

E4%

5oo!6ill Im-airmet Losses

a.

Goodwill is not a standalone asset, but &e&esents the 'alue of abo'e>a'e&a#e futu&e e&fo&%ance otential that cannot be assi#ned to identifiable assets such as &oe&t/ o& secific intan#ible assets. ecause e&fo&%ance otential is &elated to business oe&ations, to %easu&e i%ai&%ents in its 'alue it %ust be conne cted with a secific business unit. n the case of Fi%e Ea&ne&, as discussed in the te*t of hate& 4, #oodwill is assi#ned to I5etwo&9sJ as a business unit. Fhe E 5etwo&9 was one a&t of this business unit, but did not co%&ise the enti&e unit.

b.

i&st, Fi%e Ea&ne& has the otion to e&fo&% a qualitati'e anal/sis to dete&%ine if it is %o&e li9el/ than not that the business units boo9 'alue e*ceeds its fai& 'alue. f so, the fai& 'alue of the business unit is calculated and co%a&ed with its boo9 'alue. f boo9 'alue e*ceeds fai& 'alue, we dete&%ine the a%ount of the i%ai&%ent, if an/, b/ co%a&in# the fai& 'alue of the #oodwill with its boo9 'alue. Bn i%ai&%ent loss is &eo&ted if boo9 'alue e*ceeds fai& 'alue. 2ince Fhe E 5etwo&9 was shut down, its futu&e e&fo&%ance will no lon#e& benefit Fi%e Ea&ne&, and the i%ai&%ent cha&#e is a&o&iate. Kad the qualitati'e assess%ent otion been a'ailable in !006, Fi%e Ea&ne& would li9el/ ha'e b/assed this otion due to st&on# indicato&s that Fhe E 5etwo&9s futu&e cash flows we&e si#nificantl/ i%ai&ed.

c.

Fi%e Ea&ne& has a -0L inte&est in Fhe E, so unde& M.2. GBBA it does not ha'e a cont&ollin# inte&est and &eo&ts its in'est%ent usin# the equit/ %ethod. Fi%e Ea&ne&s equit/ in the net inco%e of Fhe E is &eo&ted as a&t of consolidated othe& inco%e. Fhe in'est%ent balance is &eo&ted as a&t of consolidated assets. Fhe Es indi'idual assets, liabilities, &e'enues and e*enses a&e not &eo&ted on the consolidated financial state%ents.



E4%7

Pro8e)ti* Cosoli!atio Etries

a. () "and qui%ent, net

80,000 18,000

n'est%ent in 2a%son C8,000 n'ento&/ has been sold, and the equi%ent &e'aluation as of the sta&t of the thi&d /ea& is $0,000 – (! * 6,000) = $18,000. (3) ?e&eciation e*ense

6,000 qui%ent, net

b. () "and

6,000

80,000 n'est%ent in 2a%son

80,000

n'ento&/ has been sold, and the equi%ent &e'aluation has been co%letel/ w&itten off. Fhe&efo&e no eli%inatin# ent&/ (3) is a&o&iate. c.

5o eli%inatin# ent&ies a&e necessa&/ to &eco#ni7e o& w&ite off the &e'aluations, because the assets &equi&in# &e'aluation ha'e been eithe& sold o& w&itten off.



E4%9

I!eti/ia:le Ita*i:les a! 5oo!6ill, U%S% 5AAP

B%o&ti7ation e*ense fo& !014 usto%e& &elationshis a'o&able leaseholds Fotal

$4,000,0004 $8,000,000-

$ 1,000,000 1,600,000 $!,600,000

%ai&%ent testin# – identifiable intan#ibles usto%e& &elationshis oo9 'alue = $4,000,000 – ! * ($4,000,0004) = $!,000,000 oo9 'alue : 2u% of undiscounted cash flows; $!,000,000 : $1,!00,000 $C00,000 = $1,100,000 a'o&able leaseholds oo9 'alue = $8,000,000 – 1.- * ($8,000,000-) = $-,600,000 oo9 'alue : 2u% of undiscounted cash flows; $-,600,000 N $6,000,000 5o &and na%es oo9 'alue = $18,000,000 oo9 'alue : 2u% of discounted cash flows; $18,000,000 : $@,000,000 $@,000,000 = $11,000,000 %ai&%ent testin# – Goodwill Re-orti* Uit

Uit 0; < B;=

0air ;alue o/ 5+

5+ im-airmet loss

Bsia

$400,000,000 : $00,000,000 5o $-0,000,000: $!00,000,000 5o $-00,000,000N $600,000,000
$-00,000,000 – 8-,000,000 = 11-,000,000

$!-0,000,000 – 11-,000,000 = $1-,000,000

2outh B%e&ica u&oe

2u%%a&/ B%o&ti7ation e*ense – identifiable intan#ibles %ai&%ent losses – identifiable intan#ibles Goodwill i%ai&%ent loss Fotal


$

!,600,000 1!,100,000 1-,000,000 $14C,@00,000

©Cambridge Business Publishers, 2013 1"

E4%#> I!eti/ia:le Ita*i:les a! 5oo!6ill, I0RS

B%o&ti7ation e*ense fo& !014 usto%e& &elationshis a'o&able leaseholds Fotal

$4,000,0004 $8,000,000-

$ 1,000,000 1,600,000 $!,600,000

%ai&%ent testin# – identifiable intan#ibles usto%e& &elationshis oo9 'alue = $4,000,000 – ! * ($4,000,0004) = $!,000,000 oo9 'alue : 2u% of discounted cash flows; $!,000,000 : $C00,000 $C00,000 = $1,100,000 a'o&able leaseholds oo9 'alue = $8,000,000 – 1.- * ($8,000,000-) = $-,600,000 oo9 'alue : 2u% of discounted cash flows; $-,600,000 : $4,400,000 $@,000,000 = $11,000,000 %ai&%ent testin# – Goodwill Re-orti* Uit

Uit 0; < B;=

5+ im-airmet loss

. Bsia

$1-0,000,000 N $!00,000,000
$!00,000,000 – 1-0,000 = $-0,000,000O i%ai&%ent li%ited to full #oodwill balance of $40,000,000.

ndonesia &a7il edite&&anean

$1!0,000,000 : $100,000,000 5o $140,000,000 :$10,000,000 5o $1C0,000,000 N $!!0,000,000
2candina'ia

$!0,000,000 N $00,000,000
2u%%a&/ B%o&ti7ation e*ense – identifiable intan#ibles %ai&%ent losses – identifiable intan#ibles Goodwill i%ai&%ent loss Fotal

©Cambridge Business Publishers, 2013 1#

$!!0,000,000 – 1C0,000,000 = $0,000,000 $00,000,000 – !0,000,000 = $@0,000,000

$

!,600,000 1,00,000 140,000,000 $1--,C00,000


E4%## Cosoli!ate! I)ome Statemet

a. (amounts in millions) 2ales $-,000 + !,000 ost of #oods sold $,000 + 800 + 160 G&oss %a&#in ?e&eciation e*ense $-00 + 140 – (!0010) nte&est e*ense $100 + 60 + (100-) 3the& e*enses $600 + @00 Fotal oe&atin# e*enses 5et inco%e

b.

$@,000 ,C60 ,040 6!0 180 1,00 !,100 $ C40

Aa&son &eo&ts its own inco%e of $800 %illion lus its equit/ in the inco%e of 2oae& of $140 %illion. quit/ in the inco%e of 2oae& is 2oae&s &eo&ted inco%e adPusted fo& w&ite>offs of 2oae&s net asset &e'aluations. onsolidated inco%e is Aa&sons and 2oae&s &eo&ted &e'enues and e*enses, with 2oae&s e*enses adPusted fo& the &e'aluation w&iteoffs. Aa&sons sea&atel/ &eo&ted inco%e and consolidated inco%e the&efo&e &eo&t the sa%e ite%s, ac9a#ed diffe&entl/.


©Cambridge Business Publishers, 2013 1$

E4%#$ Amorti?atio a! Im-airmet Testi* o/ I!eti/ia:le Ita*i:le Assets

a. Te)(olo*' B&&o/o Eeb*

$1-,000- * C1! = $1!,0004 * 11! =

Customer Relatios(i-s B&&o/o Eeb*

$14,000@ * C1! = $1-,0006 * 11! =

Fotal a%o&ti7ation e*ense

$

!,!-0 6,-00

1,-00 !,1!$ 1!,@-

b.

Te)(olo*' B&&o/o Eeb* Customer Relatios(i-s B&&o/o Eeb*

@10@ oo9 'alue: oo9 Mndiscounted 'alue cash flows; %ai&%ent loss $ 1!,@-0 $1!,@-0:$14,000; 5o >> >> 0-,-00 $0-,-00:$00,000; !-0,000 = $ --,-00

>> 1!,-00 $1!,-00:$16,000; 5o 1-0,8@- $1-0,8@-:$140,000; 100,000 =

Fotal i%ai&%ent loss

>> -0,8@$106,@-

c.

B&&o/o Eeb* @10@ boo9 'alue

©Cambridge Business Publishers, 2013 1%

Te)(olo*' $ 1!,@-0 !-0,000 $ !6!,@-0

Customer Relatios(i-s $ 1!,-00 100,000 $ 11!,-00


E4%#. Cosoli!atio Usi* Cost Met(o!

alculation of total #oodwill is as follows Bcquisition cost oo9 'alue of a9e& *cess of acquisition cost o'e& boo9 'alue ai& 'alue less boo9 'alue uildin#s Goodwill

$

@,-00,000 (-,000,000) !,-00,000

(1,000,000) $ 1,-00,000

alculation of adPust%ent to in'est%ent balance to con'e&t it to co%lete equit/ %ethod at Danua&/ 1, !01 a9e& &eo&ted inco%e, !00@>!01! a9e& &eo&ted di'idends, !00@>!01! e'aluation w&iteoffs, !00@>!01! uildin#s ($1,000,000!-) * 6 BdPust%ent to n'est%ent in a9e&, 111

$ 1,00,000 (400,000)

$

(!40,000) 660,000

onsolidation wo&9in# ae& eli%inatin# ent&ies fo& !01 (B) n'est%ent in a9e&

660,000 2toc9holde&s equit/ –Bda%

() ?i'idend inco%e – Bda%

660,000 100,000

?i'idends – a9e& () 2toc9holde&s equit/Ha9e&, 11

100,000 -,C00,000

n'est%ent in a9e& -,C00,000 2toc9holde&s equit/, Danua&/ 1, !01 = $-,000,000 + 1,00,000 – 400,000 = $-,C00,000. () uildin#s, net Goodwill

@60,000 1,-00,000

n'est%ent in a9e& e'aluations at Danua&/ 1, !01 = o&i#inal &e'aluations less w&iteoffs fo& !00@>!01!. (3) ?e&eciation e*ense Goodwill i%ai&%ent loss

40,000 100,000 uildin#s, net Goodwill


!,!60,000

40,000 100,000

©Cambridge Business Publishers, 2013 1&

PROBLEMS P4%#

Co!ese! Cosoli!ate! 0ia)ial Statemets Oe 1ear a/ter A)&uisitio

a.

alculation of equit/ in net inco%e fo& !014 2antos &eo&ted net inco%e e'aluation w&iteoffs n'ento&/ (1) Alant assets $8,000,0008 Aatents $1,-00,0004 "on#>te&% debt $1,000,00010 Goodwill i%ai&%ent loss quit/ in net inco%e of 2anto

$ -,000,000 (!,000,000) (1,000,000) (@-,000) 100,000 (400,000) $ 1,!-,000

(1) 2antos be#innin# in'ento&/ on its own boo9s is $,000,000 (= $-,!00,000 + 4,000,000 – 6,!00,000). 2ince 2antos cost of #oods sold is $4,000,000, its be#innin# in'ento&/ is co%letel/ sold in !014, and the &e'aluation is w&itten off. b. Cosoli!atio +ori* Pa-er, De)em:er .#, $>#4 Trial Bala)es Tae 0rom Boos Dr @Cr

Elimiatios Cosoli!ate!

Poo

Sato

ash and &ecei'ables n'ento&/ Alant assets, net n'est%ent in 2anto

$ 4,-00,000 -,000,000 8,000,000 !6,!-,000

$ ,100,000 -,!00,000 1!,000,000 >>

Aatents Goodwill u&&ent liabilities "on#>te&% debt aital stoc9 etained ea&nin#s, Dan. 1 2ales quit/ in inco%e of 2antos ost of #oods sold ?e&eciation and a%o&ti7ation e*ense nte&est and othe& e*enses GE i%ai&%ent loss

>> >> (-,100,000) (!0,000,000) (8,000,000) (4,800,000) (0,000,000) (1,!-,000) 18,000,000 !,000,000

>> >> (!,000,000) (,00,000) (6,000,000) (4,000,000) (1,!00,000) >> 4,000,000 ,!00,000

-,400,000 >> $ >0>


1,000,000 >> $ >0>

Dr

Bala)es

Cr $

() !,000,000 () 8,000,000

() 1,-00,000 () 4,-00,000 (3>4) 100,000 () 6,000,000 () 4,000,000

!,000,000 (3>1) 1,000,000 (3>!) 1,!-,000 () 10,000,000 () 1-,000,000 () @-,000 (3>) 400,000 (3>-) 1,000,000

()

() 1,!-,000 (3>1) !,000,000 (3>!) 1,000,000 (3>) @-,000 (3>-) 400,000 $ 1,!00,000

100,000 (3>4) QQQQQQQ $1,!00,000

@,600,000 10,!00,000 !@,000,000 >>

1,1!-,000 4,100,000 (@,100,000) (!4,!00,000) (8,000,000) (4,800,000) (4,!00,000) >> !4,000,000 6,-@-,000 6,00,000 400,000 $ >0>


P4%#

)otiue!

c. Cosoli!ate! Statemet o/ I)ome a! Retaie! Eari*s 0or t(e 1ear $>#4 2ales $ 4,!00,000 osts of #oods sold (!4,000,000) G&oss %a&#in 1C,!00,000 3e&atin# e*enses ?e&eciation and a%o&ti7ation e*ense $ 6,-@-,000 nte&est and othe& e*enses 6,00,000 Goodwill i%ai&%ent loss 400,000 (1,!@-,000) 5et inco%e -,C!-,000 etained ea&nin#s, be#innin# balance 4,800,000 etained ea&nin#s, endin# balance $ 10,@!-,000 Cosoli!ate! Bala)e S(eet, De)em:er .#, $>#4 Assets ash and &ecei'ables n'ento&/ Alant assets, net Aatents Goodwill Fotal assets Lia:ilities a! sto)(ol!ers e&uit' u&&ent liabilities "on#>te&% debt aital stoc9 etained ea&nin#s Fotal liabilities and stoc9holde&s equit/


$

@,600,000 10,!00,000 !@,000,000 1,1!-,000 4,100,000 $ -0,0!-,000 $

@,100,000 !4,!00,000 8,000,000 10,@!-,000 $ -0,0!-,000


P4%$

E&uit' Met(o! a! Elimiati* Etries T(ree 1ears a/ter A)&uisitio

a.

alculation of equit/ in net inco%e fo& !014 2unset oasts &eo&ted net inco%e fo& !014 e'aluation w&iteoffs Alant assets ($1,000,000)10 dentifiable intan#ibles $,600,000!0 quit/ in net inco%e of 2unset oast

$ !00,000 100,000 (180,000) $ 1!0,000

5ote dentifiable intan#ibles at the date of acquisition a&e $!,100,000 + -00,000 + 1,000,000 = $,600,000. b.

alculation of in'est%ent balance at ?ece%be& 1, !014 n'est%ent in 2unset oast, ?ece%be& 1, !011 2unset oasts &eo&ted inco%e, !01!>!014 2unset oasts &eo&ted di'idends, !01!>!014 (-0L of &eo&ted inco%e) e'aluation w&iteoffs, !01!>!014 Alant assets ($1,000,000)10 *  dentifiable intan#ibles ($,600,000!0) *  n'est%ent in 2unset oast, ?ece%be& 1, !014

$ ,-00,000 8-0,000 (4!-,000) 00,000 (-40,000) $ ,68-,000

5ote to inst&ucto& Mnde& "3 and inc&easin# in'ento&/, the acquisition date &e'alued in'ento&/ is assu%ed to still be on hand. c.

onsolidation wo&9in# ae& eli%inatin# ent&ies fo& !014 () quit/ in net inco%e of 2unset oast

1!0,000 ?i'idends – 2unset oast (.- * $!00,000) n'est%ent in 2unset oast


100,000 !0,000


P4%$

)otiue!

() 2toc9holde&s equit/H2unset oast, 11

1,@!-,000

n'est%ent in 2unset oast 1,@!-,000 2unset oasts stoc9holde&s equit/, ?ece%be& 1, !011 = $1,400,000 (acquisition cost $,-00,000 less e*cess o'e& boo9 'alue $!,100,000). 2unset oasts stoc9holde&s equit/, Danua&/ 1, !014 = $1,400,000 + (1 > .-)(8-0,000 – !00,000) = $1,@!-,000. () dentifiable intan#ibles

,!40,000

n'ento&/ -00,000 Alant assets, net 800,000 n'est%ent in 2unset oast 1,C40,000 e'aluations at Danua&/ 1, !014 = o&i#inal &e'aluations less w&iteoffs fo& !01! and !01. (3) Alant assets, net B%o&ti7ation e*ense

100,000 180,000 ?e&eciation e*ense dentifiable intan#ibles

d.

100,000 180,000

Auffins inco%e f&o% its own oe&ations lus equit/ in net inco%e of 2unset oast = consolidated net inco%e $600,000 + $1!0,000 = $@!0,000.



P4%.

Cosoli!atio at E! o/ 0irst 1ear, Prea)&uisitio Coti*e)'

a.

alculation of equit/ in net inco%e fo& !01 2ande&s &eo&ted net inco%e fo& !01 e'aluation w&iteoffs n'ento&/ $80,000 * 60L qui%ent $!00,00010 quit/ in net inco%e of 2ande&s Ae&9insent&ies fo& !01 n'est%ent in 2ande&s e&#e& e*enses est&uctu&in# e*enses

$ -00,000 (48,000) (!0,000) $ 4!,000

4,000,000 -0,000 100,000 ash

n'est%ent in 2ande&s

4,1-0,000 4!,000

quit/ in net inco%e of 2ande&s ash

4!,000 1-0,000

n'est%ent in 2ande&s b.

1-0,000

onsolidation wo&9in# ae& eli%inatin# ent&ies fo& !01 () quit/ in net inco%e of 2ande&s

4!,000 ?i'idends – 2ande&s n'est%ent in 2ande&s

() 2toc9holde&s equit/H 2ande&s, 11

!,!00,000 n'est%ent in 2ande&s


1-0,000 !8!,000

!,!00,000


P4%.

Cosoli!atio at E! o/ 0irst 1ear, Prea)&uisitio Coti*e)'

() n'ento&/ qui%ent, net n>&ocess &esea&ch and de'elo%ent Goodwill

80,000 !00,000 00,000 1,0-,000 "awsuit liabilit/ n'est%ent in 2ande&s

8-,000 1,800,000

5ote ecause the chan#e in the lawsuit liabilit/ occu&s within the %easu&e%ent e&iod, the inc&eased liabilit/ 'alue inc&eases acquisition date #oodwill. (3) ost of #oods sold ?e&eciation e*ense

48,000 !0,000 n'ento&/ qui%ent, net

P4%4

48,000 !0,000

Cosoli!ate! Bala)e S(eet +ori* Pa-er, Bar*ai Pur)(ase @see relate! P.%4


a.

alculation of equit/ in net inco%e fo& !01 2a*ons &eo&ted net inco%e fo& !01 ($10,000 + 10 – 8,000 – 40 – !- – 1,600) e'aluation w&iteoffs n'ento&/ a&9etable secu&ities uildin#s and equi%ent $00!0 "on#>te&% debt $110quit/ in net inco%e of 2a*on

$ 4(100) -0 (1-) (!!) $ !-8

alculation of n'est%ent balance, ?ece%be& 1, !01 n'est%ent balance, ?ece%be& 1, !01! (1) quit/ in net inco%e fo& !01 ?i'idends fo& !01 n'est%ent balance, ?ece%be& 1, !01 (1)

$!,000 !-8 (100) $!,1-8

Aa*on acqui&ed 2a*on fo& $1,800, but the&e is a ba&#ain #ain that inc&eases the in'est%ent balance b/ $!00, as follows



P4%4

)otiue!

alculation of #ain on acquisition Bcquisition cost oo9 'alue ($100 + -0 + 84-) *cess of acquisition cost o'e& boo9 'alue *cess of fai& 'alue o'e& boo9 'alue n'ento&/ a&9etable secu&ities "and uildin#s and equi%ent "on#>te&% debt (discount) Gain on acquisition

$ 1,800 (1,!C-) -0$ 100 (-0) !400 110 $

@0!00

Fhe&efo&e Aa*ons ent&/ to &eco&d the acquisition was n'est%ent in 2a*on

!,000 ash Gain on acquisition

1,800 !00

b. Cosoli!atio +ori* Pa-er, De)em:er .#, $>#. Trial Bala)es Tae 0rom Boos Dr @Cr

ash and &ecei'ables n'ento&/ a&9etable secu&ities n'est%ent in 2a*on

"and uildin#s and equi%ent, net u&&ent liabilities "on#>te&% debt o%%on stoc9 Bdditional aid>in caital etained ea&nin#s, Dan. 1 ?i'idends 2ales &e'enue quit/ in inco%e of 2a*on Gain on sale of secu&ities ost of #oods sold ?e&eciation e*ense nte&est e*ense 3the& oe&atin# e*enses


Pao

Sao

$ ,100 !,!60 >> !,1-8

$

6-0 ,600 (!,0!0) (-,000) (-00) (1,!00) (!,610) -00 (0,000) (!-8) >> !6,000 00 !-0 !,@@0 $ >0>

800 C40 >> >>

00 1,1-0 (1,!00) (4-0) (100) (-0) (84-) 100 (10,000) >> (10) 8,000 40 !1,600 $ >0>

Elimiatios

Dr () 100 (3>!) -0

() !4() 00 () 110 () 100 () -0 () 84-

Cosoli!ate! Bala)es

Cr 100 (3>1) -0 () 1-8 () 1,!C- () @0- () 1- (3>) !! (3>4)

100

()

() !-8 -0 (3>!) (3>1) 100 (3>) 1(3>4) !! QQQQQQ $ !,4C-

QQQQQQQ $ !,4C-

$ ,C00 ,!00 >> >>

1,1C-,0(,!!0) (-,6!) (-00) (1,!00) (!,610) -00 (40,000) >> (60) 4,100 -!C@ 4,@0 $ >0>


P4%4

)otiue!

c. Cosoli!ate! Statemet o/ I)ome a! Retaie! Eari*s 0or t(e 1ear $>#. 2ales $ 40,000 osts of #oods sold (4,100) G&oss %a&#in -,C00 3e&atin# e*enses ?e&eciation e*ense $ -nte&est e*ense !C@ 3the& oe&atin# e*enses 4,@0 (-,0!!) nco%e befo&e othe& #ains 8@8 Gain on sale of secu&ities 60 5et inco%e C8 etained ea&nin#s, Danua&/ 1 !,610 ?i'idends (-00) etained ea&nin#s, ?ece%be& 1 $ ,048 Cosoli!ate! Bala)e S(eet, De)em:er .#, $>#. Assets ash and &ecei'ables n'ento&/ "and uildin#s and equi%ent, net Fotal assets Lia:ilities a! sto)(ol!ers e&uit' u&&ent liabilities "on#>te&% debt o%%on stoc9 Bdditional aid>in caital etained ea&nin#s Fotal liabilities and stoc9holde&s equit/


$

,C00 ,!00 1,1C-,0$ 1,0 $

,!!0 -,6! -00 1,!00 ,048 $ 1,0


P4%2

5oo!6ill Allo)atio a! Im-airmet

a. dentifiable assets acqui&ed "iabilities assu%ed 5et identifiable assets acqui&ed Fotal acquisition cost Fotal #oodwill

$ 60,000,000 (!-,000,000) -,000,000 @-,000,000 $ 40,000,000

Bllocation to business units

dentifiable assets acqui&ed "iabilities assu%ed 5et assets assi#ned

Mnit R $ !,000,000 (18,000,000) $ 14,000,000

Mnit < $!0,000,000 (6,000,000) $14,000,000

Mnit S $ 8,000,000 (1,000,000) $ @,000,000

Fotal $ 60,000,000 (!-,000,000) $ -,000,000

Mnit < $ 0,000,000

Mnit S

Mnit D

ai& 'alue of &eo&tin# unit

Mnit R $ -0,000,000 (14,000,000) QQ 5BQQQ

(14,000,000) QQQ5BQQQ

$ 1-,000,000 (@,000,000) QQQ5BQQQ

$!0,000,000

6,000,000

16,000,000

8,000,000

!0,000,000

(18,000,000) $ 18,000,000

(8,000,000) $ 8,000,000

(4,000,000) $ 4,000,000

(10,000,000) $10,000,000

"ess 5et assets assi#ned nc&ease in fai& 'alue Fentati'e allocation of #oodwill Fotal tentati'e allocation is $80,000,000O #oodwill to be assi#ned is $40,000,000. -0L &eduction Bllocation of #oodwill



P4%2

)otiue!

b.

2te 1 of i%ai&%ent test o%a&e the fai& 'alue of each &eo&tin# unit at ?ece%be& 1, !014 with its boo9 'alue at that date.

ai& 'alue at ?ece%be& 1, !014 oo9 'alue at ?ece%be& 1, !014 ?iffe&ence A&eli%ina&/ conclusion

Mnit R

Mnit <

Mnit S

Mnit D

$0,000,000

$ 1-,000,000

$ 1!,000,000

$ @-,000,000

4,000,000 $( 4,000,000) a/ be i%ai&ed

!0,000,000 $(-,000,000) a/ be i%ai&ed

10,000,000 $!,000,000 5ot i%ai&ed

@!,000,000 $(!,000,000) 5ot i%ai&ed

2te ! of the i%ai&%ent test o& those &eo&tin# units whe&e #oodwill %a/ be i%ai&ed, calculate the i%lied fai& 'alue of #oodwill at ?ece%be& 1, !014 and co%a&e to the boo9 'alue of #oodwill at that date.

ai& 'alue of &e o&tin# unit ai& 'alue of identifiable net assets at ?ece%be& 1, !014 %lied 'alue of #oodwill oo9 'alue of #oodwill ?iffe&ence onclusion

Mnit R $ 0,000,000

Mnit < $ 1-,000,000

!,000,000 @,000,000 18,000,000 $ (11,000,000) Goodwill is i%ai&ed

6,000,000 C,000,000 8,000,000 $ 1,000,000 Goodwill is not i%ai&ed

Goodwill is i%ai&ed fo& eo&tin# Mnit R. Bn $11,000,000 #oodwill i%ai&%ent loss should be &eco&ded at ?ece%be& 1, !014.



P4%3

Ita*i:le Assets a! 5oo!6ill Amorti?atio a! Im-airmet

!01 a%o&ti7ation e*ense usto%e& lists $-00,000?e'eloed technolo#/ $800,00010 Fotal

$ 100,000 80,000 $ 180,000

!01 i%ai&%ent test fo& identifiable intan#ibles

3&i#inal boo9 'alue "ess a%o&ti7ation !011 !01! !01 oo9 'alue, ?ece%be& 1, !01

usto%e& lists $ -00,000

?e'eloed technolo#/ $ 800,000

(100,000) (100,000) (100,000) $ !00,000

(80,000) (80,000) (80,000) -60,000

$

nte&net do%ain na%e $ 1,00,000 – – QQQ–QQQQQ $ 1,00,000

2te 1 of i%ai&%ent test Fo dete&%ine whethe& i%ai&%ent has occu&&ed, co%a&e the undiscounted futu&e cash flows f&o% the asset to its boo9 'alue.

utu&e undiscounted cash flows oo9 'alue ?iffe&ence onclusion

usto%e& lists $ !-0,000 !00,000 $ -0,000 5ot i% ai&ed

?e'eloed technolo#/ $ -00,000 -60,000 $ (60,000) %ai&ed

nte&net do%ain na%e $ 1,000,000 1,00,000 $ (00,000) %ai&ed

2te ! of i%ai&%ent test o& intan#ibles that a&e dee%ed i%ai&ed in 2te 1, calculate a%ount of i%ai&%ent as the diffe&ence between discounted cash flows and boo9 'alue.

utu&e discounted cash flows oo9 'alue %ai&%ent


?e'eloed technolo#/ $ 4!0,000 -60,000 $ 140,000

nte&net do%ain na%e $ @-0,000 1,00,000 $ --0,000


P4%3

)otiue!

!01 #oodwill i%ai&%ent test 2te 1 of i%ai&%ent test co%a&e fai& 'alue of &eo&tin# unit at ?ece%be& 1, !01 to the boo9 'alue of the unit at that date. ai& 'alue of &eo&tin# unit oo9 'alue ?iffe&ence

$1@,000,000 18,-00,000 $(1,-00,000)

onclusion Goodwill %a/ be i%ai&ed. 2te ! of i%ai&%ent test alculate the i%lied fai& 'alue of #oodwill at ?ece%be& 1, !01 and co%a&e to the boo9 'alue at that date. ai& 'alue of &eo&tin# unit ai& 'alue of identifiable net assets %lied fai& 'alue of #oodwill oo9 'alue of #oodwill ?iffe&ence

$ 1@,000,000 14,!00,000 !,800,000 6,!00,000 $ (,400,000)

onclusion Goodwill i%ai&%ent loss is $,400,000. 2u%%a&/ B%o&ti7ation e*ense fo& !01 usto%e& lists ?e'eloed technolo#/ % ai&%ent w&ite>offs fo& !01 ?e'eloed technolo#/ nte&net do%ain na%e Goodwill Fotal e*ense fo& !01


$

$

100,000 80,000 140,000 --0,000 ,400,000

$

180,000

4,0C0,000 $ 4,!@0,000


P4%

Cosoli!ate! Bala)e S(eet +ori* Pa-er, T(ree 1ears a/ter A)&uisitio @see relate! P.%$


a.

alculation of equit/ in net inco%e fo& fiscal !011, !01!, and !01

G3s &eo&ted net inco%e (loss) e'aluation w&iteoffs A&oe&t/, lant and equi%ent $(60)!0 Aatents and t&ade%a&9s $10"on#>te&% debt $() Bd'anced technolo#/ $-usto%e& lists i%ai&%ent loss Goodwill i%ai&%ent loss quit/ in net inco%e of G3

$>## $ 1-

$>#$ $ (!)

 (!) 1 (1)

 (!) 1 (1) (!) Q() $ (6)

Q(!) $ 14

$>#. $ 1! (1)

 (!) 1 (1) (4) Q(!) $ @

(1) $1! = $C00 – 800 – 88 alculation of n'est%ent balance, Dune 0, !01 n'est%ent balance, Dune 0, !010 (adPusted to &e%o'e ea&nin#s contin#enc/) quit/ in net inco%e fo& fiscal !011 quit/ in net inco%e fo& fiscal !01! quit/ in net inco%e fo& fiscal !01 nc&ease in G3s B3 fo& fiscal !011>!01 (= $- – ) n'est%ent balance, Dune 0, !01


$ 110 14 (6) @ QQ! $ 1!@


P4%

)otiue!

b. Cosoli!atio +ori* Pa-er, ue .>, $>#. Trial Bala)es Tae 0rom Boos Dr% @Cr%

Elimiatios Cosoli!ate!

ITI u&&ent assets A&oe&t/, lant and equi%ent, net dentifiable intan#ible assets

$

n'est%ent in G3

Goodwill (1) u&&ent liabilities "on#>te&% liabilities o%%on stoc9 Bdditional aid>in caital etained ea&nin#s, Dul/ 1 Bccu%ulated othe& co%&ehensi'e inco%e F&easu&/ stoc9 2ales &e'enue quit/ in inco%e of 2a*on ost of #oods sold Goodwill i%ai&%ent loss 3the& oe&atin# e*enses

!! 600

5OC $

Dr

1! 140

() (3>1) 

1,100

0

() 6 ()  () !

1!@

>>

>> (1@-) (1,1!-) (!!) (-80) (118)

>> (10) (10-) (4) (60) 1!

(!0) 8 (!,000) (@) 1,400 >> -80

(-) ! (C00) >> 800 >> 88

QQQQQ

QQQQQ

$

$ >0>

-4

1

()

1!

()

!

()

()

! (3>!) 1 (3>4) 4 (3>-) @ () -- () 6- () ! (3>6)

(3>) 1 () 4 () 60

()

@

(3>6) ! (3>!) ! (3>4) 1 (3>-) 4 $ !0C

 (3>1) 1 (3>) QQQQQQQ $ !0C

!4C 68C 1,1--

>>

81 (18-) (1,!0) (!!) (-80) (118) (!0) 8 (!,C00) >> !,!00 !

QQQQ6@1 $ >0>

>0>

(1) Bcquisition>date #oodwill is calculated as follows Bcquisition cost (adPusted) G3s boo9 'alue *cess of acquisition cost o'e& boo9 'alue *cess of fai& 'alue o'e& boo9 'alue n'ento&/ A&oe&t/, lant and equi%ent Aatents and t&ade%a&9s Bd'anced technolo#/ usto%e& lists "on#>te&% debt


$

() 8

()

Bala)es

Cr

$ 110 (40) @0 $

(60) 10 !()

Q(18)


Goodwill


$

88


P4%

)otiue!

c. Cosoli!ate! Statemet o/ I)ome a! Retaie! Eari*s 0or 0is)al $>#. 2ales &e'enue osts of #oods sold G&oss %a&#in 3e&atin# e*enses Goodwill i%ai&%ent loss $ ! 3the& oe&atin# e*enses Q6@1 5et inco%e etained ea&nin#s, be#innin# balance etained ea&nin#s, endin# balance Cosoli!ate! Bala)e S(eet, ue .>, $>#. Assets u&&ent assets A&oe&t/, lant and equi%ent, net dentifiable intan#ible assets Goodwill Fotal assets Lia:ilities a! sto)(ol!ers e&uit' u&&ent liabilities "on#>te&% liabilities o%%on stoc9 Bdditional aid>in caital etained ea&nin#s Bccu%ulated othe& co%&ehensi'e inco%e F&easu&/ stoc9 Fotal liabilities and stoc9holde&s equit/


$ !,C00 (!,!00) @00

QQ6@ !@ QQ118 $ 14-

$

!4C 68C 1,1-QQ81 $ !,1@4

$

181,!0 !! -80 14!0 QQ(8) $ !,1@4


P4%7

+ori* Pa-er Elimiati* Etries, Partial 1ear Cosoli!atio @see relate! P.%.

(all numbers in millions)

a.

alculation of quit/ in net inco%e fo& !00 Aha&%acias &eo&ted net inco%e e'aluation w&iteoffs n'ento&/ A&oe&t/, lant and equi%ent $(1@)!0 * 8.-1! n>&ocess &esea&ch and de'elo%ent ?e'eloed technolo#/ &i#hts $1,-C611 * (8.-1!) "on#>te&% debt 3the& assets $(1-,606)10 * (8.-1!) quit/ in net inco%e of Aha&%acia

b.

$

-,000

(!,CC) 11 (@16) (!,0-) 1! 1,10$ 48

onsolidation wo&9in# ae& eli%inatin# ent&ies fo& !00 () quit/ in net inco%e of Aha&%acia

48 n'est%ent in Aha&%acia

() 2toc9holde&s equit/HAha&%acia, 4160

48

@,!6 n'est%ent in Aha&%acia

() n'ento&/ "on#>te&% in'est%ents n>&ocess T? ?e'eloed technolo#/ &i#hts Goodwill

!,CC 40 -,0-! @,066 !1,04 A&oe&t/, lant and equi%ent "on#>te&% debt 3the& assets n'est%ent in Aha&%acia


@,!6

1@ 1,841 1-,606 48,6@


P4%7

)otiue!

(3) ost of #oods sold A&oe&t/, lant and equi%ent %ai&%ent loss B%o&ti7ation e*ense "on#>te&% debt 3the& assets

!,CC 11 @16 !,01! 1,10n'ento&/ ?e&eciation e*ense n>&ocess &esea&ch and de'elo%ent ?e'eloed technolo#/ &i#hts nte&est e*ense 3the& oe&atin# e*enses

P4%9

5oo!6ill Im-airmet Testi*, I0RS a! U%S% 5AAP

a.

As !010 annual &eo&t states the followin#

!,CC 11 @16 !,01! 1,10-

Fhe futu&e cash flows a&e adPusted fo& &is9s secific to the cash>#ene&atin# unit and a&e discounted usin# a &e>ta* discount &ate. Fhe discount &ate is de&i'ed f&o% the #&ous ost>ta* wei#hted a'e&a#e cost of caital and is adPusted whe&e alicable to ta9e into account an/ secific &is9 &elatin# to the count&/ whe&e the cash>#ene&atin# unit is located.

ash flows a&e adPusted fo& secific &is9s and the alicable ta* effects befo&e the/ a&e discounted, the&eb/ ta9in# into conside&ation diffe&ences in the unce&taint/ of the business en'i&on%ent. ost li9el/ the cash flows of *lo&ation and A&oduction se#%ent GMs a&e %o&e unce&tain than those of efinin# and a&9etin#, althou#h the two se#%ents a&e closel/ &elated. f the cash flows we&e not adPusted, the discount &ate should be adPusted to &eflect diffe&ences in &is9.



P4%9

)otiue!

b.

E-loratio a! Pro!u)tio C5U

MU M2 est of wo&ld Fotal

;alue i use $ C,000 -,000 !,-00 $ 46,-00

Boo "alue $ 1,114 6,144 !,840 $ 10,0C8

Im-airmet loss 5one 5one $ 40

Re/ii* a! Mareti* C5U hine V "ub&icants 3the& Fotal

;alue i use $ 1,000 6,000 4,000 $ !,000

Boo "alue Im-airmet loss $ 1,--@ 5one 1,C8 5one 4,880 $ 880 $ 8,@-

Fotal #oodwill i%ai&%ent loss is $40 + 880 = $1,!!0 c.

$!,840 – !,140 = $@00, su##estin# a GE i%ai&%ent loss of that a%ount. Kowe'e&, total #oodwill allocated to the est of Eo&ld GM is $60. Fhe&efo&e, the #oodwill i%ai&%ent loss is $60, and othe& assets of the GM would be w&itten down, based on a&o&iate i%ai&%ent tests.

d.

M.2. GBBA &equi&es #oodwill to be assi#ned to &eo&tin# units, in this case *lo&ation and A&oduction, and efinin# and a&9etin#. Ehen testin# fo& i%ai&%ent, A has the otion to e&fo&% a qualitati'e assess%ent of each &eo&tin# unit, usin# econo%ic, financial, and st&ate#ic facto&s, to dete&%ine if it is %o&e li9el/ than not that the units boo9 'alue e*ceeds its fai& 'alue. f so, the &eo&tin# units #oodwill is e'aluated usin# a two>ste test. Goodwill is tested fo& i%ai&%ent onl/ if the esti%ated fai& 'alue of the &eo&tin# unit is in fact less than its boo9 'alue. ecause fai& 'alue is #ene&all/ calculated usin# discounted cash flows, we assu%e it can be a&o*i%ated b/ 'alue>in> use. o& both &eo&tin# units abo'e, 'alue in use si#nificantl/ e*ceeds boo9 'alue, so no i%ai&%ent loss is &eo&ted, whethe& A uses o& b/asses the qualitati'e test. ecause &eo&tin# units a##&e#ate GMs, it is li9el/ that GMs with bo o9 'alue #&eate& than 'alue in use will be offset b/ those with a 'alue in use that is #&eate& than boo9 'alue when al/in# the fi&st ste fo& i%ai&%ent testin# unde& M.2. GBBA.



P4%#> Cosoli!atio Oe a! T6o 1ears a/ter A)&uisitio

a.

Fhe in'est%ent cost a%ounts to $-C8,000,000 = ($-C0,000,000 – $1-,000,000) + $!,000,000, and the $!48,000,000 e*cess of acquisition cost o'e& boo9 'alue ($-C8,000,000 – $-0,000,000) is allocated as follows, with #oodwill bein# the &esidual at the botto% *cess of acquisition cost o'e& boo9 'alue Bllocation to identifiable ite%s n'ento&ies dentifiable intan#ibles (->/ea& life) n>&ocess &esea&ch and de'elo%ent (A?) Alant assets (!0>/ea& life, st&ai#ht>line) Goodwill (unallocated balance)

b.

$ !48,000,000 (0,000,000) (40,000,000) (60,000,000) (-0,000,000) $ 68,000,000

!00@ equit/ inco%e acc&ual sse*s &e o&ted net inco%e e'aluation w&ite>offs 3 in'ento&/ sold (.4 R $0,000,000) B%o&ti7ation of identifiable intan#ibles ($40,000,000-) ?e&eciation of lant assets ($-0,000,000!0) Goodwill i%ai&%ent quit/ inco%e acc&ual

$ 140,000,000 (1!,000,000) (8,000,000) (!,-00,000) (1-,000,000) $ 10!,-00,000

?ece%be& 1, !00@ wo&9in# ae& eli%inations () quit/ inco%e acc&ual

10!,-00,000 ?i'idends – sse* (.-- * $140,000,000) n'est%ent in sse*

() 2toc9holde&s equit/ – sse*, 1!-0@

-0,000,000 n'est%ent in sse*


@@,000,000 !-,-00,000

-0,000,000


P4%#> )otiue!

() n'ento&ies dentifiable intan#ibles n>&ocess &esea&ch and de'elo%ent Alant assets Goodwill

0,000,000 40,000,000 60,000,000 -0,000,000 68,000,000 n'est%ent in sse*

(3) ost of #oods sold B%o&ti7ation e*ense ?e&eciation e*ense Goodwill i%ai&%ent loss

!48,000,000

1!,000,000 8,000,000 !,-00,000 1-,000,000 n'ento&ies dentifiable intan#ibles Bccu%ulated de&eciation Goodwill

c.

1!,000,000 8,000,000 !,-00,000 1-,000,000

!008 equit/ inco%e acc&ual sse*s &eo&ted net inco%e e'aluation w&ite>offs B%o&ti7ation of identifiable intan#ibles ($40,000,000-) ?e&eciation of lant assets ($-0,000,000!0) A? i%ai&%ent quit/ inco%e acc&ual

$160,000,000 (8,000,000) (!,-00,000) (!0,000,000) $1!C,-00,000

?ece%be& 1, !008, wo&9in# ae& eli%inations () quit/ inco%e acc&ual

1!C,-00,000 ?i'idends – sse* (.-- * $160,000,000) n'est%ent in sse*


88,000,000 41,-00,000


P4%#> )otiue!

() 2toc9holde&s equit/ – sse*, 1108 (1) (1)

41,000,000

n'est%ent in sse* $-0,000,000 + $140,000,000 > $@@,000,000

41,000,000

() n'ento&ies (.6 * $0,000,000) dentifiable intan#ibles n>&ocess &esea&ch and de'elo%ent Alant assets Goodwill

18,000,000 !,000,000 60,000,000 -0,000,000 -,000,000 Bccu%. de&eciation n'est%ent in sse*

!,-00,000 !10,-00,000

(3) B%o&ti7ation e*ense ?e&eciation e*ense A? i%ai&%ent loss

8,000,000 !,-00,000 !0,000,000 dentifiable intan#ibles Bccu%ulated de&eciation A?


8,000,000 !,-00,000 !0,000,000


P4%## Ita*i:les u!er I0RS

a.

Ehe&eas the double>declinin# balance &ate is twice the st&ai#ht>line &ate, 1-0L declinin# balance is 1.- * 10L st&ai#ht>line &ate, o& 1-L. ollowin# the con'entional declinin#> balance calculations, we ha'e this a%ount of a%o&ti7ation e*ense fo& !01, the second /ea& afte& acquisition B%o&ti7ation e*ense = .1- * W!00 %illion – (.1- * !00 %illion) = W!-.- %illion

b.

Bt ?ece%be& 1, !01!, the boo9 'alue is W6 %illion afte& !01! a%o&ti7ation of W4 %illion, and the %a&9et 'alue of these intan#ibles is W4- %illion. ?ece%be& 1, !01! ent&ies a&e (all amounts in millions)  B%o&ti7ation e*ense

4 ntan#ible assets

4

ntan#ible assets

C e'aluation su&lus (3)

C

?ece%be& 1, !01, ent&ies a&e B%o&ti7ation e*ense

ntan#ible assets

-

W4- %illionC = W- %illion e'aluation su&lus (3) "oss (inco%e)

C 1 ntan#ible assets

10

Bt this oint the endin# boo9 'alue is W0 %illion (= W40 – 4 + C – - – 10, equal to the %a&9et 'alue on that date. c.

2 i%ai&%ent loss = boo9 'alue – #&eate& of ('alue>in>use, W1,800 %illionO %a&9et 'alue, W1,-00 %illion) = W!,000 – 1,800 = W!00 %illion. M.2. GBBA i%ai&%ent loss = 0 (su% of undiscounted cash flows W!,-00 %illion : boo9 'alue, W!,000 %illion, indicatin# Ino i%ai&%entJ). Fhe two>ste test in M.2 GBBA &e%o'es so%e otential i%ai&%ents f&o% conside&ation because of the boo9 'alue undiscounted cash flows sc&een. 2 di&ectl/ co%a&es fai& 'alue (%a&9et 'alue o& 'alue>in>use, whiche'e& is hi#he&) with boo9 'alue. 2ince fai& 'alue is lowe& than the su% of the undiscounted cash flows, 2 will li9el/ &eco#ni7e %o&e i%ai&%ent losses o'e& ti%e than M.2. GBBA.



P4%#$ Cosoli!atio i 0irst 1ear, Ita*i:le Asset Issues

(all dollar amounts in millions) a. 5et Bssets = Bssets > "iabilities $!6,C00 = $(!0,800 + C,400 + 4,800) – "iabilities "iabilities = $-,000 – $!6,C00 "iabilities = $8,100

b.

Goin# Ib/ the boo9,J the question is si%l/ whethe& useful li'es can be &easonabl/ esti%ated o& whethe& the intan#ible has an ob'iousl/ 'e&/ lon# indete&%inate (indefinite) life. an/ cases will be clea&>cut and can be Pustified to the audito&s but othe&s will be in #&a/ a&eas such that the desi&ed &eo&tin# &esult will call fo&th the case Pustif/in# the classification of the intan#ible one wa/ o& anothe&. n these #&a/ a&eas, %ana#e%ent %a/ elect to %ini%i7e e&iodic a%o&ti7ation cha&#es a#ainst ea&nin#s and ta9e thei& chances on the so%ewhat &ando% and 'e&/ subPecti'e i%ai&%ent tests. Fo the e*tent ossible, %ana#e%ent would li9el/ classif/ ite%s and load cost in the indefinite>li'ed cate#o&/ to %ini%i7e the effect on ea&nin#s.

c.

Eith i%ai&%ent cha&#es bein# a&t of inco%e f&o% continuin# oe&ations, co%anies %a/ see9 to lowe& the &obabilit/ that the/ will ha'e to &eco#ni7e #oodwill i%ai&%ent cha&#es. Fhe subPecti'it/ inhe&ent in 'aluin# the &eo&tin# units to which the #oodwill is assi#nedHcash flow fo&ecasts and discount &ate selectionsHfacilitates decisions to load #oodwill onto &eo&tin# units that a&e less>li9el/ i%ai&%ent candidates, i.e., units with fai& 'alue si#nificantl/ abo'e boo9 'alue.

d.

e'aluation of li%ited>life intan#ibles is $!,000 (= $,000 – $1,000). B%o&ti7ation of this &e'aluation fo& !00@ = $!,0001- * C1! = $100. quit/ %ethod inco%e = $1,000 – $100 = $C00 onsolidation wo&9in# ae& ent&ies () quit/ inco%e

C00 ?i'idendsHa&e%a&9 n'est%ent in a&e%a&9

() 2toc9holde&s equit/Ha&e%a&9 (1) (1)

1,@00

n'est%ent in a&e%a&9 $!6,C00 – $!0,800 – ($C,400 – $-,000)


--0 -0

1,@00


P4%#$ )otiue!

() Goodwill dentifiable intan#ibles, li%ited life dentifiable intan#ibles, indefinite life (!)

!0,800 !,000 !,400 n'est%ent in a&e%a&9

(!)

!-,!00

$6,400 – $4,000

(3) B%o&ti7ation e*ense

100 dentifiable intan#ibles, li%ited life

100

P4%#. Cost Met(o! a! Elimiati* Etries T(ree 1ears a/ter A)&uisitio

alculation of n'est%ent balance at Danua&/ 1, !014 n'est%ent in 2unset oast, ?ece%be& 1, !011 2unset oasts &eo&ted inco%e, !01!>!01 2unset oasts &eo&ted di'idends, !01!>!01 (-0L of &eo&ted inco%e) e'aluation w&iteoffs, !01!>!01 Alant assets ($1,000,000)10 * ! dentifiable intan#ibles ($,600,000!0) * ! n'est%ent in 2unset oast, Danua&/ 1, !014

$ ,-00,000 6-0,000 (!-,000) !00,000 (60,000) $ ,66-,000

5ote to inst&ucto& Mnde& "3 and inc&easin# in'ento&/, the acquisition date &e'alued in'ento&/ is assu%ed to still be on hand. onsolidation wo&9in# ae& eli%inatin# ent&ies fo& !014 (B) n'est%ent in 2unset oast

,66-,000 2toc9holde&s equit/H Auffin, 11

() ?i'idend inco%e

100,000 ?i'idends – 2unset oast (.- * $!00,000)


,66-,000

100,000


Ch 4 SOL.docx

Recommend Documents