Assume that on January 1, 20X2, investors form Acme Corp agree to consolidate th
ID: 2414923 • Letter: A
Question
Assume that on January 1, 20X2, investors form Acme Corp agree to consolidate the operations of ABC, Inc., and DEF Company in a deal valued at $2.0 billion. Acme organizes each former entity as an operating segment. Additionally, Acme two divisions—ABC Hot and ABC Cold—that, along with DEF, are treated as independent reporting units for internal performance evaluation and management reviews. ACME recognizes $215 million as goodwill at the merger date of January 1, 20X3 and allocates this entire amount to its reporting units. That information and each reporting unit's acquisition-date fair values are as follows.
New Corp’s Acquisition-Date Fair Values
Reporting Units Goodwill January 1, 20X3
ABC Hot $ 22,000,000 $750,000,000
ABC Cold 155,000,000 748,000,000
DEF Company 38,000,000 502,000,000
In December, 20X3, Acme Corp performed an analysis for each of its three reporting units to assess potential goodwill impairment. They examined the events that may affect the fair values of its reporting units. The analysis reveals that the fair value of each reporting unit likely exceeds its carrying amount except for ABC Cold. The goodwill impairment test then reveals that ABC Cold’s fair value has fallen to $70 million, well below its current carrying amount. Acme compared the implied fair value of ABC Cold’s goodwill to its carrying amount. Acme needs to determine the implied fair value of goodwill. The fair value of ABC Cold’s net assets as of December 31, 21X3 is shown below.
ABC Cold December 31, 20X3, fair value $70,000,000
Fair values of ABC Cold net assets at December 31, 20X3:
Current assets $ 5,000,000
Property 40,000,000
Equipment 15,000,000
Subscriber list 10,000,000
Patented technology 1,000,000
Current liabilities (4,000,000)
Long-term debt (10,000,000)
Required:
(1) What is the implied fair value of goodwill for ABC Cold?
(2) What is the carrying value of goodwill of ABC Cold before impairment?
(3) What is the impairment loss of ABC Cold?
Explanation / Answer
Goodwill is also a type of intangible asset. It is recorded only when entire business is purchased and it is excess of cost over the fair value of the identifiable net assets acquired
(1)
Implied fair value of goodwill for ABC Cold is calculated as under:
Implied Goodwill is calculated by deducting Net identifiable assets from the fair value of assets. ABC Cold December 31, 20X3, fair value of assets is $70,000,000
Net identifiable assets is $ 57,000,000
Particulars
Amount ($)
Current assets $ 5,000,000
5,000,000
Property 40,000,000
40,000,000
Equipment 15,000,000
15,000,000
Subscriber list 10,000,000
10,000,000
Patented technology 1,000,000
1,000,000
Current liabilities (4,000,000)
-4,000,000
Long-term debt (10,000,000)
-10,000,000
Net identifiable assets
57,000,000
So the Implied goodwill here is $13,000,000
Carrying value of goodwill of ABC Cold before impairment is $155,000,000
(3)
Impairment loss of ABC Cold is $142,000,000
Particulars
Amount ($)
Current assets $ 5,000,000
5,000,000
Property 40,000,000
40,000,000
Equipment 15,000,000
15,000,000
Subscriber list 10,000,000
10,000,000
Patented technology 1,000,000
1,000,000
Current liabilities (4,000,000)
-4,000,000
Long-term debt (10,000,000)
-10,000,000
Net identifiable assets
57,000,000