Michigan-based Leo Corporation acquired 100 percent of the common stock of a Bri
ID: 2486208 • Letter: M
Question
Michigan-based Leo Corporation acquired 100 percent of the common stock of a British company on January 1, 20X8, for $1,100,000. The British subsidiary's net assets amounted to 500,000 pounds on the date of acquisition. On January 1, 20X8, the book values of its identifiable assets and liabilities approximated their fair values. As a result of an analysis of functional currency indicators, Leo determined that the British pound was the functional currency. On December 31, 20X8, the British subsidiary's adjusted trial balance, translated into U.S. dollars, contained $17,000 more debits than credits. The British subsidiary reported income of 33,000 pounds for 20X8 and paid a cash dividend of 8,000 pounds on October 25, 20X8. Included on the British subsidiary's income statement was depreciation expense of 3,500 pounds. Leo uses the fully adjusted equity method of accounting for its investment in the British subsidiary and determined that goodwill in the first year had an impairment loss of 25 percent of its initial amount. Exchange rates at various dates during 20X8 follow: January 1, 1 pound = $2.10; October 25, 1 pound = $2.25; December 31, 1 pound = $2.20; Average for 20X8: 1 pound = $2.21. Based on the preceding information, on Leo's consolidated balance sheet at December 31, 20X8, what amount should be reported for the goodwill acquired on January 1, 20X8?
Explanation / Answer
Acquisition price paid in dollars on January 1, 20X8 = $1,100,000
Exchange rate on January 1, 20X8 was 1 pound = $2.10
Therefore,
Acquisition price in pounds using January 1, 20X8 exchange rate
= $1,100,000 / $2.10
= 523,809.52381 pounds
Net assets of British subsidiary on January 1, 20X8 = 500,000 pounds
Therefore,
Goodwill to be recorded in pounds on January 1, 20X8
= 523,809.52381 pounds - 500,000 pounds
= 23,809.52381 pounds
Impairment loss for the first year = 25%
Value of goodwill in pounds after recording the impairment loss on December 31, 20X8
= 23,809.52381 pounds x (1 - 0.25)
= 17,857.1428575 pounds
Exchange rate on December 31, 20X8 was 1 pound = $2.20
Therefore,
Value of goodwill in dollars using on Dcember 31, 20X8 exchange rate
= 17,857.1428575 x $2.20
= $39,285.71428 or $39,286