CHAPTER 2 EXERCISE. EXER = EXERCISE 2-6: (Asset Purchase, Contingent Consideration ) ‘On January 1, 2010, Platz Company, acquired all the net assets of Satz Company by issuing 75,000 shares of its $10 par value common stock to the stockholders of Satz Company. During negotiations Platz Company agreed to issue additional shares of common stock to the stockholders of Satz if the average postcombination earnings over the next three years equaled or exceeded $2,500,000. On January 1, 2010 the market value of Platz stock was $50 per share. Based on the information available at the acquisition date, the additional 10,000 shares are expected to be issued. Required: ‘A. Prepare the journal entry on Platz Company's books on January 1, 2010. It is expected that the camings target is likely to be met. Platz Company records goodwill on acquisition. B. Prepare the journal entry on Platz Company's books on January 1, 2014, when the additional shares are issued. On this date the market value of Platz stock is valued at $60 per share. Answer of Exercise 2-6 The amount of the contingency is $500,000 (10,000 shares at $50 per share) f | Part A on January 1, 2010, the journal entry on Platz Company's books is as follows: [za Dr. Cr. Exteael | Goodwill 500,000 Paid-in-Capital for Contingent Consideration - Issuable 500,000 Part B on January 1, 2014, when the additional shares are issued. the journal entry on Platz Company's books is as follows: Dr. [| Cr) Paid-in-Capital for Contingent Consideration - Issuable 500.000] og ac kUat ‘Common Stock ($10 par) (19,000 shares @S10 par) i 000 Paid-In-Capital in Excess of Par Platz Company does not adjust the original amount recorded as equity. Scanned with CamScannerImpairment) ‘On January 1, 2010, Porsche Company acquired the net assets of Saab Company for $450,000 cash. The fair value of Saab's identifiable net assets was $375,000 on thi: date. Porsche Company decided to measure goodwill impairment using the present value of future cash flows to estimate the fair value of the reporting unit (Saab). The information for these subsequent years is as follows: }” ‘Year Present Value of | Carrying Value of | Fair Value/Saab's Future Cash Flows |(Snab'sddentifiable | of Identifiable Net Net Assets * Assets 2011 $400,000 $330,000 $340,000 2012 ‘$400,000 $320,000 345,000 2013 $350,000 $300,000 325,000 * Identifiable net assets do not include goodwill. Require + Part A: For each year determine the amount of goodwill impairment, if any. + Part B: Prepare the journal entries needed each year to record the goodwill impairment (if any) on Porsche's books from 2011 to 2013. + Part C: How should goodwill (and ifd impairment) be presented on the balance sheet and the income statement in each year? + Part D: If goodwill is impaired, what additional information needs to be disclosed? Answer of Exercise 2-10 Net assets of Saab com ‘At fair value N. Assets at F.V 12 Scanned with CamScannerPart A. 2011: Step 1: rir Jue of the reporting unit $400,000 value of unit: Carrying value of identifiable net assets $330,000 + Carrying value of goodwill ($450,000 - $375,000) _75.000 Excess of carrying value ove fair value $5,000 The excess of carrying value over fair value means that step 2 is required. Step 2: Fair value of the reporting unit $400,000 - Fair value of identifiable net assets 340,000 Implied value of goodwill 60,000 - Recorded value of goodwill ($450,000 - $375,000) Impairment loss ($15,000) 2012: Step 1: $400,000 Carrying value of unit: Carrying value of identifiable net assets $320,000 + Carrying value of goodwill ($75,000 - $15,000) 60,000 Excess of fair value over earfying value $20,000 The excess of fair value over carrying palue means tha step 2 is not required 2013: Step 1: Fai ue of the reporting unit $350,000 Carrving value of unit Carrying value of identifiable net assets $300,000 + Carrying value of goodwill ($75,000 - $15,000) _60,000 Excess of carrying value over fair value $ 10,000 The excess of carrying value over fair value means that step 2 is required. Step 2: \ 50,000 Fair value of the reporting unit se - Fair value of identifiable net assets 35,000 Implied valae of Seed } 15,000) ¢ = Recorded value of goodwi impalement Tose eal ($75,000-S (6 35,000) Scanned with CamScannerPart B, the journal entries needed each year to record the goodwill impairment (if any) on Porsche's books from 2011 to 2013. 2011: Dr. Cr. Impairment Loss—Goodwill 7 15,000 Goodwill 15,000 2012: Dr. Cr. No entry 2013: Dr. Cr. Impairment Loss—Goodwill 35,000 Goodwill 35,000 Part C. : | FASB ASC paragraph 350-20-45-1 specifies the presentation of goodwill in the balance | sheet and income statement (if impairment occurs) ag follows: + The aggregate amount of goodwill should be a separate line item in the balance sheet. + The aggregate amount of losses from goodwill impairment should be shown as a separate line item in the operating fection of the income statement unless some of the impairment is associated with a discontinued operation (in which case it is shown net-of-ax in the discontinued operation section). Part D. Ina period in which an impairment loss occurs, FASB ASC paragraph 350-20-45-2 mandates the following disclosures in the notes: 1) A description of the facts and circumstances leading to the impairment; 2) The amount of the impairment loss aad the method of determining the fair value of the reporting unit; 3) The nature and amounts of any adjustments made to impairment estimates from earlier periods, if significant, Scanned with CamScanner