On January 1, Prine, Inc., acquired 100 percent of Lydia Companys common stock f
ID: 2333846 • Letter: O
Question
On January 1, Prine, Inc., acquired 100 percent of Lydia Companys common stock for a fair value of $123,975,500 in cash and stock Lydia's assets and liabilities equaled their fair values except for its equipment, which was undervalued by $675,000 and had a 10-year remaining life. Prine specializes in media distribution and viewed its acquisition of Lydia as a strategic move into content ownership and creation. Prine expected both cost and revenue synergies from controlling Lydia's artistic content (a large library of classic movies) and its sports programming specialty video operation. Accordingly, Prine allocated Lydia's assets and liabilities (including $52,912,500 of goodwill) to a newly formed operating segment appropriately designated as a reporting unit. The fair values of the reporting unit's identifiable assets and liabilities through the first year of operations were as follows. 12/31 $ 252,000 375,500 600,000 1,215,000 40,900,000 61,270,000 Broadcast licenses (indefinite remaining 1ife) 15,180,000 20,830,000 20,790,000 19,810,000 Receivables (net) Movie library (25-year remaining life) Equipment (10-year remaining life) Current liabilities (579,000) (652,500) (6,080,000) (6,260,000) However, Lydia's assets have taken longer than anticipated to produce the expected synergies with Prine's operations. Accordingly, Prine reviewed events and circumstances and concluded that Lydia's fair value was likely less than its carrying amount. At year-end, Prine reduced its assessment of the Lydia reporting unit's fair value to $114,068,000. At December 31, Prine and Lydia submitted the following balances for consolidation. There were no intra-entity payables on that date. Lydia Co. 15,500,000 17,600,000 100,000 Prine, Inc s (20,700,000) $(18,000,000) Equity in Lydia earnings Dividends declared Retained earnings, 1/1 (332,500) 200,000 (59,700,000) (2,888,000) 387,000 445,000 375,500 1,215,000 124,208,000 Broadcast licenses Movie library Equipment (net) 367,500 600,000 13,720,000 48,000,000 17,000,000 141,700,000 liabilities (975,000) (472,500) (26,700,000) (9,150,000) (175,000,000) (67,500,000) Long-term debt Prev 6 of 13 Next >Explanation / Answer
As per policy only first four questions will be answered
Part A
Prine should compare Lydias total fair value to its carrying value, as follows:
12/31 Carrying value (equity method balance).......................................................$124,208,000
12/31/07 Fair value.................................. 114,068,000
Excess carrying value over fair value $10,140,000
Because fair value is less than carrying value, Prine is required to further test whether goodwill is impaired.
Part B
12/31 Fair value for Lydia................... ....... $114,068,000
Fair values of assets and liabilities
Cash....................... $375,500
Receivables (net).... 1215000
Movie library........... 61270000
Broadcast licenses... 20830000
Equipment.................19810000
Current liabilities....... (652500)
Long-term debt.......... (6260000)
Total net fair value .................................... ... 96588000
Implied fair value for goodwill ..................... .... .. 17480000
Carrying value for goodwill....................... ........... 52912500
Impairment loss................................ ................... $35432500
Journal Entry by Prine:
Goodwill impairment loss Dr............ 35432500
Investment in Lydia Co. Cr............................... 35432500
Part C
Combined revenues....................... $38700000
Combined expenses (including excess amortization)....................... ............. 33167500
Income before impairment loss...... 5532500
Goodwill impairment loss Lydia....... (35432500)
Net loss............................................. $(29,900,000)
Part D
Consolidated goodwill = $52912500 – $35432500 = $17480000
Part A
Prine should compare Lydias total fair value to its carrying value, as follows:
12/31 Carrying value (equity method balance) $120,070,000
12/31/07 Fair value 110,000,000
Excess carrying value over fair value $10,070,000
Because fair value is less than carrying value, Prine is required to further test whether goodwill is impaired.
b. 12/31/07 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)
Long-term debt (6,250,000)
Total net fair value 93,106,000
Implied fair value for goodwill 16,894,000
Carrying value for goodwill 50,000,000
Impairment loss $33,106,000
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
Income before impairment loss 7,800,000
Goodwill impairment lossLydia (33,106,000)
Net loss $(25,306,000)
d. Consolidated goodwill = $50,000,000 – $33,106,000 = $16,894,000