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Homework answers / question archive / On March 31 2018 sanders corps purchased Arizona’s inc for $75 million
On March 31 2018 sanders corps purchased Arizona’s inc for $75 million. On the date of purchase Arizona’s’ assets had a book value of $86million and a fair value of $108million, Arizona’s liabilities had a book value and fair market value of $68 million
Problem 2
TESTING WHETHER PATENT IS IMPAIRED
As part of the acquisition of Arizona, sanders acquired a patent with a remaining life of 8 years, sanders recorded the patent on March 31, 2018 at a value of $5,000,000. On dec 31,2018 sanders management decided that both the goodwill and the patent for Arizona should be tested for impairment
The following information was available dec 31, 2018 related to the patent
Sum of future cash flows discounted to present value #3,500,000
Sum of future cash flows not discounted to present value (undiscounted) $4,200,000
Fair market value of patent $3,900,000
2a) show the full impairment test that sanders will perform at dec 31, 2018 to determine the amount of impairment loss to record related to its patent (if any)
2b) at what amount would sanders report the patent on its dec 31st balance sheet after performing the impairment test
TESTING WHETHER GOODWILL IS IMPAIRED
Sanders used the following information to test whether goodwill associated with Arizona’s is impaired as of dec 31 2018
Book value of Arizona’s net asset $73,000,000
fair market value of Arizona’s business unit $67,000,000
3a) determine the amount of goodwill impairment loss (if any) that sanders should recognize as at dec 31 2018
3b) at what value would sanders report goodwill associated with Arizona’s within its dec 31 2018 balances sheet after performing the impairment test
Answers
Problem 1:
The amount of goodwill that sanders should record because of acquisition of Arizona’s
Goodwill = Purchase consideration - Net Asset(measured at fair value)
Purchase consideration = $75Million
Net Asset = Asset at fair vlaue - Liabilities at fair value
Net Asset = $108Million - $68Million = $40Million
Goodwill = $75 Million - $40 Million
= $35 Million
Problem 2a.
Impairment test and Impairment loss.
Impairment Loss = Carrying amount - Recoverable amount
Carrying amount = Opening balance or purchase - Amortization
carrying amount = $50,00,000 - ($50,00,000/8years)
= $43,75,000.
Recoverable amount is higher of :
1. Sum of future cash flows discounted to present value or PV of future cash flow ie $35,00,000 or
2. Fair Market Value of patent ie $39,00,000
Therefore Recoverable amount is $39,00,000
compare carrying amount with recoverable amount if carrying amount is greater than recoverable amount there is a impairment.
In this case carrying amount is higher than recoverable amount , hence there is a impairment.
Impairment loss = $43,75,000 - $39,00,000
= $475,000.
problem 2b
Reported value after impairment is $39,00,000 (carrying amount adjusted by impairment loss ie $43,75,000 - $475,000.)
Problem 3a
Book value unit (CGU including goodwill) $73,00,000
Fair market value of CGU,which is also treated as Recoverable amount = $67,00,000.
As explained above( problem 2a )carrying amount is greater recoverable amount hence there is a impairment loss.
Impairment loss should be first allocated to goodwill
Therefore the amount of goodwill impairment loss that sanders should recognize as at dec 31 2018 = $73,00,000 - $67,00,000 = $600,000.
Note: Answering limited to first 4 question,sorry.
