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
Subscriber list 10,000,000
Patented technology 1,000,000
Current liabilities (4,000,000)
Long-term debt (10,000,000)
(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?
Adelman Company owns 45% of the outstanding voting common stock of Craig Corp. and has the ability to significantly influence the investee’s operations. On January 3, 20X1, the balance in the Investment in Craig Corp. account was $462,000. Amortization associated with this acquisition is $10,000 per year. During 20X1, Craig earned a net income of $105,000 and paid cash dividends of $20,000. Previously in 20X0, Craig had sold inventory costing $28,000 to Adelman for $40,000. All but 20% of that inventory had been sold to outsiders by Adelman during 20X0. Additional sales were made to Adelman in 20X1 at a transfer price of $60,000 that had cost Craig $45,000. Only 10% of the 20X1 purchases had not been sold to outsiders by the end of 20X1.
(A) What amount of unrealized intra-entity inventory profit should be deferred by Adelman at December 31, 20X0?
(B) What amount of unrealized intra-entity profit should be deferred by Adelman at December 31, 20X1?
(C) What amount of equity income would Adelman have recognized in 20X1 from its ownership interest in Craig?
(D) What was the balance in the Investment in Craig Corp. account at December 31, 20X1?
Several years ago, Polar Inc. acquired an 80% interest in Icecap Co. The book values of Icecap’s asset and liability accounts at that time were considered to be equal to their fair values. Polar’s acquisition value corresponded to the underlying book value of Icecap so that no allocations or goodwill resulted from the transaction.
The following selected account balances were from the individual financial records of these two companies as of December 31, 20X1.
Polar Inc. Icecap Co.
Sales $896,000 $504,000
Cost of goods sold 406,000 276,000
Operating expenses 210,000 147,000
Retained earnings, 1/1/11 1,036,000 252,000
Inventory 484,000 154,000
Buildings (net) 501,000 220,000
Investment income Not given
Assume that Polar sold inventory to Icecap at a markup equal to 25% of cost. Intra-entity transfers were $130,000 in 20X0 and $165,000 in 20X1. Of this inventory, $39,000 of the 20X0 transfers were retained and then sold by Icecap in 20X1, while $55,000 of the 20X1 transfers were held until 20X2.
For the consolidated financial statements for 20X1, determine the balances that would appear for the following accounts.
(1) Cost of Goods Sold
(3) Noncontrolling Interest in Subsidiary’s Net Income
Ginvold Co. began operating a subsidiary in a foreign country on January 1, 20X1 by acquiring all of the common stock for §50,000 stickles, the local currency. This subsidiary immediately borrowed §120,000 on a 5-year note with 10% interest payable annually beginning on January 1, 20X2. A building was then purchased for §170,000 on January 1, 20X1. This property had a 10-year anticipated life and no salvage value and was to be depreciated using the straight-line method. The building was immediately rented for 3 years to a group of local doctors for §6,000 per month. By year-end, payments totaling §60,000 had been received.
On October 1, §5,000 were paid for a repair made on that date and it was the only transaction of this kind for the year. A cash dividend of §6,000 was transferred back to Ginvold at December 31, 20X1.
The functional currency for the subsidiary was the stickle (§). Currency exchange rates were as follows:
January 1, 20X1 §1 = $2.40
October 1, 20X1 §1 = $2.22
December 31, 20X1 §1 = $2.16
Average for 20X1 §1 = $2.28
(A) Prepare an income statement for this subsidiary in stickles.
(B) Translate these amounts into U.S. dollars.
The ABCD Partnership has the following balance sheet at January 1, 20X0, prior to the admission of new partner, E.
Cash and current assets $39,000 Liabilities $52,000
Land 234,000 A’s capital 26,000
Building and equipment 130,000 B’s capital 52,000
C’s capital 117,000
D’s capital 156,000
Total assets $403,000 Total liabilities and capital $403,000
E contributed $124,000 in cash to the business to receive a 20% interest in the partnership. Goodwill was to be recorded. The four original partners shared all profits and losses equally.
(A) Prepare the journal entries necessary to record goodwill.
(B) After goodwill has been recorded, what were the individual capital balances of the original partners?
(C) Prepare the journal entry necessary to record E’s contribution.