AdvAcct Chapter04 Solutions 07.13

7/31/2019 AdvAcct Chapter04 Solutions 07.13

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CHAPTER 4

SOLUTIONS TO EXERCISES AND PROBLEMS

EXERCISES

E4.1 Equity Method Accounting

Calculation of Equity in Net Income:

Williams reported net income $ 80,000,000

Revaluation writeoffs:

Plant assets $50,000,000/25 (2,000,000)

Goodwill impairment loss (25,000,000)

Equity in net income of Williams $ 53,000,000

Entries made by James during 2010:

Investment in Williams 450,000,000Capital stock 450,000,000

Investment in Williams 53,000,000

Equity in net income ofWilliams 53,000,000

Cash 24,000,000

Investment in Williams 24,000,000

E4.2 Equity Method Income and Working Paper Eliminations

(all amounts in millions)

a.Investment balance, 1/1/11 $2,286Investment balance, 1/1/10 = $2,000 + $200 2,200Change 862010 dividends 602010 equity income accrual 146Writeoff of plant asset revaluation = ($160/10) 16Sabers 2010 net income $ 162

b.Sabers stockholders equity, 1/1/10 $2,0002010 net income 1622010 dividends (60)Sabers stockholders equity, 1/1/11 $2,102

c.Sabers 2011 net income $ 130

Cambridge Business Publishers, 2010

Solutions Manual, Chapter 4 65


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Extra depreciation on revalued plant assets (16)Equity income accrual $ 114

d. (C)

Equity income accrual 114

Dividends Saber 40Investment in Saber 74

(E)

Stockholders Equity Saber 2,102

Investment in Saber 2,102

(R)

Plant assets 160

Goodwill 40

Accumulated depreciation 16Investment in Saber 184

(O)

Depreciation expense 16

Accumulated depreciation 16

e. At the beginning of 2022, the plant assets are fully depreciated and the remaining balancefor goodwill is $40 - $30 = $10.

(R)

Plant assets 160Goodwill 10

Accumulated depreciation 160

Investment in S 10

Entry (O) is not needed since no revaluations are written off in 2022.

E4.3 Consolidation at End of First Year

a. The acquisition entry is as follows:

Investment in Saddlestone 10,300,000

Merger expenses 250,000

Capital stock 10,000,000

Contingent considerationliability 300,000

Cash 250,000


66 Advanced Accounting, 1st Edition


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Calculation of 2011 Equity in Net Income:

Saddlestones reported net income $ 3,000,000

Revaluation writeoff:

Identifiable intangibles $2,000,000/5 (400,000)

Equity in net income of Saddlestone $ 2,600,000

Peaks equity method entries for 2011:


Equity in net income ofSaddlestone 2,600,000

Cash 1,000,000


b. Calculation of goodwill is as follows:

Acquisition cost $ 10,300,000

Book value of Saddlestone (7,200,000)

Excess of acquisition cost over book value 3,100,000

Identifiable intangibles (2,000,000)

Goodwill $ 1,100,000

Consolidation working paper eliminating entries for 2011:

(C)

Equity in net income ofSaddlestone 2,600,000

Dividends Saddlestone 1,000,000


(E)

Stockholders equitySaddlestone, 1/1 7,200,000


(R)

Identifiable intangibles 2,000,000

Goodwill 1,100,000


(O)

Amortization expense 400,000

Identifiable intangibles 400,000




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E4.4 Eliminating Entries after First and Second Years

a. Calculation of Equity in net income for 2012:

Safecos reported net income $ 1,600,000

Revaluation writeoffs:Equipment $500,000/5 (100,000)

Inventory 90% x $200,000 (180,000)

Goodwill impairment loss (50,000)

Equity in net income of Safeco $ 1,270,000

Peerlesss entries for 2012:

Investment in Safeco 8,000,000

Cash 8,000,000

Investment in Safeco 1,270,000Equity in net income ofSafeco 1,270,000

Cash 600,000

Investment in Safeco 600,000

Calculation of goodwill is as follows:


Book value of Safeco (7,000,000)

Excess of acquisition cost over book value 1,000,000Fair value less book value:

Equipment $ 500,000

Inventory 200,000 (700,000)

Goodwill $ 300,000


(C)

Equity in net income ofSafeco 1,270,000

Dividends Safeco 600,000


(E)

Stockholders equitySafeco,1/1 7,000,000





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(R)

Equipment, net 500,000

Inventory 200,000

Goodwill 300,000


(O)

Depreciation expense 100,000

Cost of goods sold 180,000

Goodwill impairment loss 50,000


Inventory 180,000

Goodwill 50,000

b. Calculation of Equity in Net Income for 2013:

Safecos reported net income $ 2,000,000


Equipment $500,000/5 (100,000)

Inventory 10% x $200,000 (20,000)

Equity in net income of Safeco $ 1,880,000

Peerlesss equity method entries for 2013:


Equity in net income of Safeco 1,880,000

Cash 800,000


The Investment in Safeco balance at December 31, 2013 is $8,000,000 + 1,270,000 600,000 +1,880,000 800,000 = $9,750,000.


(C)

Equity in net income of Safeco 1,880,000

Dividends Safeco 800,000


(E)

Stockholders equitySafeco,1/1 8,000,000





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Stockholders equitySafeco at 1/1/2013 = $7,000,000 + 1,600,000 600,000 = $8,000,000

(R)


Inventory 20,000

Goodwill 250,000Investment in Safeco 670,000

(O)




Inventory 20,000

E4.5 Equity Method, Eliminating Entries, Several Years after Acquisition

a. Calculation of total goodwill is as follows:


Book value of Brussels (2,000,000)

Excess of acquisition cost over book value 3,000,000

Fair value less book value:

Land $ 450,000

Buildings (400,000)


Long-term debt 250,000 (1,300,000)


b. Calculation of Equity in net income for 2010:

Brussels reported net income $ 400,000


Buildings $(400,000)/20 20,000

Long-term debt $250,000/10 (25,000)


Equity in net income of Brussels $ 345,000




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c. Calculation of Investment in Brussels, 12/31/10

Investment in Brussels, 1/1/02 $ 5,000,000

Brussels reported income, 2002-2009 3,500,000

Brussels reported dividends, 2002-2009 (1,000,000)

Revaluation writeoffs, 2002-2009:Buildings $[(400,000)/20] x 8 160,000

Identifiable intangibles (full balance) (1,000,000)

Long-term debt $[250,000/10] x 8 (200,000)


Investment in Brussels, 1/1/10 6,160,000

Equity in net income, 2010 345,000

Brussels dividends, 2010 (90,000)

Investment in Brussels, 12/31/10 $ 6,415,000

d. Consolidation working paper eliminating entries for 2010:

(C)

Equity in net income of Brussels 345,000

Dividends Brussels 90,000

Investment in Brussels 255,000

(E)

Stockholders equityBrussels, 1/1 4,500,000

Investment in Brussels 4,500,000

Stockholders equity, January 1, 2010 = $2,000,000 + 3,500,000 1,000,000 = $4,500,000.

(R)Land 450,000

Long-term debt 50,000

Goodwill 1,400,000

Investment in Brussels 1,660,000

Buildings, net 240,000

Revaluations at January 1, 2010 = original revaluations less writeoffs for 2002-2009.

(O)

Interest expense 25,000





Goodwill 50,000




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E4.6 Consolidation after Several Years

Calculation of total goodwill is as follows:


Book value of Baker (5,000,000)Excess of acquisition cost over book value 2,500,000

Fair value less book value:

Buildings (1,000,000)


Calculation of Equity in Net Income for 2011:

Bakers reported net income $ 300,000


Buildings $1,000,000/25 (40,000)

Goodwill impairment loss (100,000)Equity in net income of Baker $ 160,000

Calculation of Investment balance at December 31, 2011:

Investment in Baker, 12/31/04 $ 7,500,000

Baker reported income, 2005-2010 1,300,000

Baker reported dividends, 2005-2010 (400,000)

Revaluation writeoffs, 2005-2010:

Buildings ($1,000,000/25) x 6 (240,000)

Investment in Baker, 1/1/11 8,160,000

Equity in net income, 2011 160,000Dividends, 2011 (100,000)

Investment in Baker, 12/31/11 $ 8,220,000


(C)

Equity in net income of Baker 160,000

Dividends Baker 100,000

Investment in Baker 60,000

(E)

Stockholders equityBaker, 1/1 5,900,000

Investment in Baker 5,900,000

Stockholders equity, January 1, 2011 = $5,000,000 + 1,300,000 400,000 = $5,900,000.




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(R)


Goodwill 1,500,000

Investment in Baker 2,260,000

Revaluations at January 1, 2011 = original revaluations less writeoffs for 2005-2010.

(O)




Goodwill 100,000

E4.7 Goodwill Impairment Losses

a.

Goodwill is not a standalone asset, but represents the value of above-average future performancepotential that cannot be assigned to identifiable assets such as property or specific intangibleassets. Because performance potential is related to business operations, to measure impairments inits value it must be connected with a specific business unit. In the case of Time Warner, asdiscussed in the text of Chapter 4, goodwill is assigned to Networks as a business unit. The WBNetwork is one part of this business unit, but does not comprise the entire unit.

b.Goodwill impairment testing is accomplished in two steps. First, the fair value of the business unitis compared with its book value. If book value exceeds fair value, we go on to the second step todetermine the amount of the impairment, if any. The second step compares the fair value of the

goodwill with its carrying value. An impairment loss is reported if its carrying value exceeds itsfair value.

Since The WB Network was shut down, its future performance potential will no longer benefitTime Warner, and the impairment charge is appropriate.

c.Time Warner has a 50% interest in The CW, so under U.S. GAAP it does not have a controllinginterest and reports its investment using the equity method. Time Warners equity in the netincome of The CW is reported as part of consolidated other income. The investment balance isreported as part of consolidated assets. The CWs individual assets, liabilities, revenues and

expenses are not reported on the consolidated financial statements.




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E4.8 Projecting Consolidation Entries

a.(R)

Land 80,000

Equipment, net 18,000Investment in Samson 98,000

Inventory has been sold, and the equipment revaluation as of the start of the third year is $30,000 (2 x 6,000) = $18,000.

(O)



b.(R)

Land 80,000Investment in Samson 80,000

Inventory has been sold, and the equipment revaluation has been completely written off. Thereforeno eliminating entry (O) is appropriate.

c.No eliminating entries are necessary to recognize or write off the revaluations, because the assetsrequiring revaluation have been either sold or written off.

E4.9 Identifiable Intangibles and Goodwill, U.S. GAAP

Amortization expense for 2011:

Customer relationships $2,000,000/4 $ 500,000

Favorable leaseholds $6,000,000/5 1,200,000

Total $1,700,000

Impairment testing identifiable intangibles:

Customer relationshipsBook value = $2,000,000 2 x ($2,000,000/4) = $1,000,000

Book value > Sum of undiscounted cash flows? $1,000,000 > $800,000: YesImpairment loss = $1,000,000 - $650,000 = $350,000

Favorable leaseholdsBook value = $6,000,000 1.5 x ($6,000,000/5) = $4,200,000Book value > Sum of undiscounted cash flows? $4,200,000 < $4,500,000: No




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Brand namesBook value = $14,000,000Book value > Sum of undiscounted cash flows? $14,000,000 > $12,000,000: YesImpairment loss = $14,000,000 - $10,000,000 = $4,000,000

Impairment testing Goodwill:

Reporting Unit Unit FV < BV? Fair Value of GW GW impairment lossAsia $400,000,000 > $300,000,000:

No

South America $350,000,000> $200,000,000:No

Europe $500,000,000< $600,000,000:Yes

$500,000,000 325,000,000= 175,000,000

$250,000,000 175,000,000 =$75,000,000

Summary:Amortization expense identifiable intangibles $ 1,700,000

Impairment losses identifiable intangibles 4,350,000Goodwill impairment loss 75,000,000

Total $ 81,050,000

E4.10 Identifiable Intangibles and Goodwill, IFRS


Customer relationships $2,000,000/4 $ 500,000

Favorable leaseholds $6,000,000/5 1,200,000

Total $1,700,000

Impairment testing identifiable intangibles:

Customer relationshipsBook value = $2,000,000 2 x ($2,000,000/4) = $1,000,000Book value > Sum of discounted cash flows? $1,000,000 > $650,000: YesImpairment loss = $1,000,000 - $650,000 = $350,000

Favorable leaseholdsBook value = $6,000,000 1.5 x ($6,000,000/5) = $4,200,000Book value > Sum of discounted cash flows? $4,200,000 > $3,800,000: Yes

Impairment loss = $4,200,000 $3,800,000 = $400,000

Brand namesBook value = $14,000,000Book value > Sum of discounted cash flows? $14,000,000 > $10,000,000: YesImpairment loss = $14,000,000 - $10,000,000 = $4,000,000




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Impairment testing Goodwill:

Reporting Unit Unit FV < BV? GW impairment lossE. Asia $310,000,000 > $200,000,000: No

Indonesia $90,000,000 < $100,000,000: Yes $100,000,000 90,000,000 =$10,000,000

Brazil $125,000,000 < $130,000,000: Yes $130,000,000 125,000,000 =$5,000,000

Mediterranean $180,000,000 < $220,000,000: Yes $220,000,000 180,000,000 =$40,000,000

Scandinavia $190,000,000 < $300,000,000: Yes $300,000,000 190,000,000 =$110,000,000; impairment limited tofull goodwill balance of $100,000,000.

Summary:Amortization expense identifiable intangibles $ 1,700,000Impairment losses identifiable intangibles 4,750,000Goodwill impairment loss 155,000,000

Total $161,450,000

E4.11 Consolidated Income Statement

a.(amounts in millions)

Sales $5,000 + 2,000 $7,000

Cost of goods sold $3,000 + 800 + 160 3,960

Gross margin 3,040

Depreciation expense $500 + 140 (200/10) 620

Interest expense $100 + 60 + (100/5) 180

Other expenses $600 + 700 1,300

Total operating expenses 2,100

Net income $ 940

b.Parson reports its own income of $800 million plus its equity in the income of Soaper of $140million. Equity in the income of Soaper is Soapers reported income adjusted for write-offs ofSoapers net asset revaluations. Consolidated income is Parsons and Soapers reported revenuesand expenses, with Soapers expenses adjusted for the revaluation writeoffs. Parsons separatelyreported income and consolidated income therefore report the same items, packaged differently.




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E4.12 Amortization and Impairment Testing of Identifiable Intangible Assets

a.

Technology

Arroyo $15,000/5 x 9/12 = $ 2,250WebEx $312,000/4 x 1/12 = 6,500

Customer Relationships

Arroyo $14,000/7 x 9/12 = 1,500

WebEx $153,000/6 x 1/12 = 2,125

Total amortization expense $ 12,375

b.

Technology

7/31/07Bookvalue

Book value>Undiscountedcash flows? Impairment loss

Arroyo $ 12,750 $12,750>$14,000? No -- --

WebEx 305,500 $305,500>$300,000? Yes $305,500-250,000= $ 55,500

Customer

Relationships

Arroyo 12,500 $12,500>$16,000? No -- --

WebEx 150,875 $150,875>$140,000? Yes $150,875-100,000= 50,875

Total impairment loss $106,375

c.

Technology

Customer

Relationships

Arroyo $ 12,750 $ 12,500

WebEx 250,000 100,000

7/31/07 book value $ 262,750 $ 112,500




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PROBLEMS

P4.1 Condensed Consolidated Financial Statements One Year after Acquisition


Santos reported net income $ 5,000,000


Inventory (1) (2,000,000)

Plant assets $8,000,000/8 (1,000,000)

Patents $1,500,000/4 (375,000)

Long-term debt $1,000,000/10 100,000


Equity in net income of Santo $ 1,325,000

(1) Santos beginning inventory on its own books is $3,000,000 (= $5,200,000 + 4,000,000

6,200,000). Since Santos cost of goods sold is $4,000,000, its beginning inventory iscompletely sold in 2010, and the revaluation is written off.

b.

Consolidation Working Paper, December 31, 2010Trial Balances Taken From

Books

Dr (Cr)

Eliminations

Ponon Santo Dr Cr

Consolidated

Balances

Cash and receivables $ 4,500,000 $ 3,100,000 $ 7,600,000

Inventory 5,000,000 5,200,000 (R) 2,000,000 2,000,000 (O-1) 10,200,000Plant assets, net 8,000,000 12,000,000 (R) 8,000,000 1,000,000 (O-2) 27,000,000

Investment in Santo 26,325,000 -- 1,325,000 (C)10,000,000 (E)15,000,000 (R)

--

Patents -- -- (R) 1,500,000 375,000 (O-3) 1,125,000

Goodwill -- -- (R) 4,500,000 400,000 (O-5) 4,100,000

Current liabilities (5,100,000) (2,000,000) (7,100,000)

Long-term debt (20,000,000) (3,300,000) (O-4) 100,000 1,000,000 (R) (24,200,000)

Capital stock (8,000,000) (6,000,000) (E) 6,000,000 (8,000,000)

Retained earnings, Jan. 1 (4,800,000) (4,000,000) (E) 4,000,000 (4,800,000)

Sales (30,000,000) (13,200,000) (43,200,000)

Equity in income of Santos (1,325,000) -- (C) 1,325,000 --Cost of goods sold 18,000,000 4,000,000 (O-1) 2,000,000 24,000,000

Depreciation andamortization expense

2,000,000 3,200,000 (O-2) 1,000,000(O-3) 375,000 6,575,000

Interest and other expenses 5,400,000 1,000,000 100,000 (O-4) 6,300,000

GW impairment loss -- -- (O-5) 400,000 _______ 400,000

$ -0- $ -0- $ 31,200,000 $31,200,000 $ -0-




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c.

Consolidated Statement of Income and Retained Earnings For the Year 2010

Sales $ 43,200,000

Costs of goods sold (24,000,000)

Gross margin 19,200,000

Operating expenses:Depreciation and amortization expense $ 6,575,000

Interest and other expenses 6,300,000

Goodwill impairment loss 400,000 (13,275,000)

Net income 5,925,000

Retained earnings, beginning balance 4,800,000

Retained earnings, ending balance $ 10,725,000

Consolidated Balance Sheet, December 31, 2010

Assets

Cash and receivables $ 7,600,000

Inventory 10,200,000Plant assets, net 27,000,000

Patents 1,125,000

Goodwill 4,100,000

Total assets $ 50,025,000

Liabilities and stockholders equity

Current liabilities $ 7,100,000

Long-term debt 24,200,000

Capital stock 8,000,000

Retained earnings 10,725,000

Total liabilities and stockholders equity $ 50,025,000

P4.2 Equity Method and Eliminating Entries Three Years after Acquisition

a. Calculation of Equity in Net Income for 2012:

Sea Coasts reported net income for 2012 $ 130,000


Plant assets ($100,000)/10 10,000

Identifiable intangibles $300,000/20 (15,000)

Equity in net income of Sea Coast $ 125,000




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b. Calculation of Investment balance at December 31, 2012:

Investment in Sea Coast, December 31, 2009 $ 2,000,000

Sea Coasts reported income, 2010-2012 400,000

Sea Coasts reported dividends, 2010-2012 (60% of reported

income) (240,000)Revaluation writeoffs, 2010-2012:

Plant assets [($100,000)/10] x 3 30,000

Identifiable intangibles ($300,000/20) x 3 (45,000)

Investment in Sea Coast, December 31, 2012 $ 2,145,000

Note to instructor: Under LIFO and increasing inventory, the acquisition daterevalued inventory is assumed to still be on hand.

c. Consolidation working paper eliminating entries for 2012:

(C)Equity in net income of Sea Coast 125,000

Dividends Sea Coast(.6 x $130,000) 78,000

Investment in SeaCoast 47,000

(E)

Stockholders equitySea Coast,1/1 1,508,000

Investment in Sea Coast

1,508,000Sea Coasts stockholders equity, December 31, 2009 = $1,400,000 (acquisition cost $2,000,000less excess over book value $600,000).

Sea Coasts stockholders equity, January 1, 2012 = $1,400,000 + (1 - .6)(400,000 130,000) =$1,508,000.

(R)

Inventory 400,000


Plant assets, net 80,000

Investment in SeaCoast 590,000

Revaluations at January 1, 2012 = original revaluations less writeoffs for 2010 and 2011.




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(O)

Plant assets, net 10,000

Amortization expense 15,000



d.Pelicans income from its own operations plus equity in net income of Sea Coast = consolidated

net income: $500,000 + $125,000 = $625,000.

P4.3 Consolidation at End of First Year, Preacquisition Contingency


Sanders reported net income for 2011 $ 500,000


Inventory $80,000 x 60% (48,000)Equipment $200,000/10 (20,000)

Equity in net income of Sanders $ 432,000

Perkinsentries for 2011:

Investment in Sanders 4,000,000

Merger expenses 50,000

Restructuring expenses 100,000

Cash 4,150,000

Investment in Sanders 432,000

Equity in net income ofSanders 432,000

Cash 150,000

Investment in Sanders 150,000

b. Consolidation working paper eliminating entries for 2011:

(C)

Equity in net income ofSanders 432,000

Dividends Sanders 150,000Investment in Sanders 282,000

(E)

Stockholders equitySanders, 1/1 2,200,000





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(R)

Inventory 80,000


In-process research anddevelopment 300,000

Goodwill 1,305,000Lawsuit liability 85,000


Note: Because the change in the lawsuit liability occurs within the measurement period, theincreased liability value increases acquisition date goodwill.

(O)



Inventory 48,000


P4.4 Consolidated Balance Sheet Working Paper, Bargain Purchase (see related P3.4)



Saxons reported net income for 2013 ($10,000 + 10 8,000 40 25 1,600) $ 345


Inventory (100)Marketable securities 50

Buildings and equipment $300/20 (15)

Long-term debt $110/5 (22)

Equity in net income of Saxon $ 258

Calculation of Investment balance, December 31, 2013:

Investment balance, December 31, 2012 (1) $2,000

Equity in net income for 2013 258

Dividends for 2013 (100)

Investment balance, December 31, 2013 $2,158

(1) Paxon acquired Saxon for $1,800, but there is a bargain gain that increases the investmentbalance by $200, as follows:




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Calculation of gain on acquisition:

Acquisition cost $ 1,800

Book value ($100 + 350 + 845) (1,295)

Excess of acquisition cost over book value 505

Excess of fair value over book value:

Inventory $ 100Marketable securities (50)

Land 245

Buildings and equipment 300

Long-term debt (discount) 110 705

Gain on acquisition $ 200

Therefore Paxons entry to record the acquisition was:

Investment in Saxon 2,000

Cash 1,800

Gain on acquisition 200

b.

Consolidation Working Paper, December 31, 2013Trial Balances Taken

From Books

Dr (Cr)

Eliminations

Paxon Saxon Dr Cr

Consolidated

Balances

Cash and receivables $ 3,100 $ 800 $ 3,900

Inventory 2,260 940 (R) 100 100 (O-1) 3,200

Marketable securities -- -- (O-2) 50 50 (R) --Investment in Saxon 2,158 -- 158 (C)

1,295 (E)705 (R)

--

Land 650 300 (R) 245 1,195

Buildings and equipment, net 3,600 1,150 (R) 300 15 (O-3) 5,035

Current liabilities (2,020) (1,200) (3,220)

Long-term debt (5,000) (450) (R) 110 22 (O-4) (5,362)

Common stock (500) (100) (E) 100 (500)

Additional paid-in capital (1,200) (350) (E) 350 (1,200)

Retained earnings, Jan. 1 (2,610) (845) (E) 845 (2,610)

Dividends 500 100 100 (C) 500

Sales revenue (30,000) (10,000) (40,000)Equity in income of Saxon (258) -- (C) 258 --

Gain on sale of securities -- (10) 50 (O-2) (60)

Cost of goods sold 26,000 8,000 (O-1) 100 34,100

Depreciation expense 300 40 (O-3) 15 355

Interest expense 250 25 (O-4) 22 297

Other operating expenses 2,770 1,600 ______ _______ 4,370

$ -0- $ -0- $ 2,495 $ 2,495 $ -0-




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c.

Consolidated Statement of Income and Retained Earnings For the Year 2013

Sales $ 40,000

Costs of goods sold (34,100)

Gross margin 5,900Operating expenses:

Depreciation expense $ 355

Interest expense 297

Other operating expenses 4,370 (5,022)

Income before other gains 878

Gain on sale of securities 60

Net income 938

Retained earnings, January 1 2,610

Dividends (500)

Retained earnings, December 31 $ 3,048

Consolidated Balance Sheet, December 31, 2013

Assets

Cash and receivables $ 3,900

Inventory 3,200

Land 1,195

Buildings and equipment, net 5,035

Total assets $ 13,330


Current liabilities $ 3,220


Common stock 500

Additional paid-in capital 1,200

Retained earnings 3,048

Total liabilities and stockholders equity $ 13,330

P4.5 Goodwill Allocation and Impairment

a.

Identifiable assets acquired $ 53,000,000

Liabilities assumed (19,000,000)Net identifiable assets acquired 34,000,000

Total acquisition cost 50,000,000

Total goodwill $ 16,000,000




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Allocation to business units:

Unit X Unit Y Unit Z Total

Identifiable assets acquired $ 30,000,000 $16,000,000 $ 7,000,000 $ 53,000,000

Liabilities assumed (12,000,000) (5,000,000) (2,000,000) (19,000,000)

Net assets assigned $ 18,000,000 $11,000,000 $ 5,000,000 $ 34,000,000

Unit X Unit Y Unit Z Unit J

Fair value of reporting unit $ 24,000,000 $ 15,000,000 $ 10,000,000

Less: Net assets assigned (18,000,000) (11,000,000) (5,000,000)

Increase in fair value __ N/A___ ___N/A___ ___N/A___ $ 5,000,000

Tentative allocation ofgoodwill 6,000,000 4,000,000 5,000,000 5,000,000

Total tentative allocation is$20,000,000; goodwill to beassigned is $16,000,000.

20% reduction (1,200,000) (800,000) (1,000,000) (1,000,000)Allocation of goodwill $ 4,800,000 $ 3,200,000 $ 4,000,000 $ 4,000,000

b. Step 1 of impairment test: Compare the fair value of each reporting unit at December 31,2010 with its book value at that date.

Unit X Unit Y Unit Z Unit J

Fair value atDecember 31, 2010 $26,000,000 $ 12,000,000 $ 5,000,000 $ 63,000,000

Carrying amount atDecember 31, 2010 25,000,000 13,000,000 7,000,000 65,000,000

Difference $ 1,000,000 $(1,000,000) $(2,000,000) $(2,000,000)

Preliminary conclusion Not impaired May beimpaired

May beimpaired

May beimpaired

Step 2 of the impairment test: For those reporting units where goodwill may be impaired, calculatethe implied fair value of goodwill at December 31, 2010 and compare to the carrying amount ofgoodwill at that date.

Unit Y Unit Z Unit J

Fair value of reporting unit $ 12,000,000 $ 5,000,000 $63,000,000

Fair value of identifiable net assetsat December 31, 2010 7,000,000 4,000,000 58,000,000

Implied value of goodwill 5,000,000 1,000,000 5,000,000

Carrying amount of goodwill 3,200,000 4,000,000 4,000,000

Difference $ 1,800,000 $(3,000,000) $ 1,000,000

Conclusion Goodwill is notimpaired

Goodwill isimpaired

Goodwill is notimpaired

Goodwill is impaired for Reporting Unit Z. A $3,000,000 goodwill impairment loss should berecorded at December 31, 2010.




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P4.6 Intangible Assets and Goodwill: Amortization and Impairment

2013 amortization expense:

Customer lists $500,000/5 $ 100,000

Developed technology $800,000/10 80,000Total $ 180,000

2013 impairment test for identifiable intangibles:

Customerlists

Developedtechnology

Internetdomain name

Original carrying amount $ 500,000 $ 800,000 $ 1,300,000

Less: amortization

2011 (100,000) (80,000)

2012 (100,000) (80,000)

2013 (100,000) (80,000) ________ Carrying amount, December 31, 2013 $ 200,000 $ 560,000 $ 1,300,000

Step 1 of impairment test: To determine whether impairment has occurred, compare theundiscounted future cash flows from the asset to its carrying value.

Customerlists

Developedtechnology

Internetdomain name

Future undiscounted cash flows $ 250,000 $ 500,000 $ 1,000,000

Carrying amount 200,000 560,000 1,300,000

Difference $ 50,000 $ (60,000) $ (300,000)

Conclusion Not impaired Impaired Impaired

Step 2 of impairment test: For intangibles that are deemed impaired in Step 1, calculate amount ofimpairment as the difference between discounted cash flows and carrying value.

Developedtechnology

Internetdomain name

Future discounted cash flows $ 420,000 $ 750,000

Carrying amount 560,000 1,300,000

Impairment $ 140,000 $ 550,000

2013 goodwill impairment test:

Step 1 of impairment test: compare fair value of reporting unit at December 31, 2013 to thecarrying amount of the unit at that date.

Fair value of reporting unit $17,000,000

Carrying amount 18,500,000

Difference $(1,500,000)

Conclusion: Goodwill may be impaired.




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Step 2 of impairment test: Calculate the implied fair value of goodwill at December 31, 2013 andcompare to the carrying amount at that date.

Fair value of reporting unit $ 17,000,000

Fair value of identifiable net assets 14,200,000

Implied fair value of goodwill 2,800,000Carrying amount of goodwill 6,200,000

Difference $ (3,400,000)

Conclusion: Goodwill impairment loss is $3,400,000.

Summary:


Customer lists $ 100,000

Developed technology 80,000 $ 180,000

Impairment write-offs for 2013:

Developed technology $ 140,000Internet domain name 550,000

Goodwill 3,400,000 4,090,000

Total expense for 2013 $ 4,270,000

P4.7 Consolidated Balance Sheet Working Paper, Three Years after Acquisition (see

related P3.2)


a. Calculation of Equity in Net Income for fiscal 2011, 2012, and 2013:

2011 2012 2013

Saxons reported net income (loss) $ 15 $ (2) $ 12 (1)


Property, plant and equipment $(60)/20 3 3 3

Patents and trademarks $10/5 (2) (2) (2)

Long-term debt $(3)/3 1 1 1

Advanced technology $5/5 (1) (1) (1)

Customer lists impairment loss (2) (4)

Goodwill impairment loss _(2) _(3) _(2)

Equity in net income of Saxon $ 14 $ (6) $ 7

(1) $12 = $900 800 88




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Calculation of Investment balance, June 30, 2013:

Investment balance, June 30, 2010 (adjusted to remove earnings contingency) $ 110

Equity in net income for fiscal 2011 14

Equity in net income for fiscal 2012 (6)

Equity in net income for fiscal 2013 7

Increase in GOCs AOCI for fiscal 2011-2013 (= $5 3) __2Investment balance, June 30, 2013 $ 127

b.

Consolidation Working Paper, June 30, 2013Trial Balances

Taken From Books

Dr. (Cr.)

Eliminations

ITI GOC Dr Cr

Consolidated

Balances

Current assets $ 232 $ 12 (R) 5 $ 249

Property, plant andequipment, net 600 140 (O-1) 3 54 (R) 689

Identifiable intangible assets 1,100 30 (R) 6(R) 3(R) 23

2 (O-2)1 (O-4)4 (O-5)

1,155

Investment in GOC 127 -- 7 (C)55 (E)65 (R)

--

Goodwill (1) -- -- (R) 83 2 (O-6) 81

Current liabilities (175) (10) (185)

Long-term liabilities (1,125) (105) (O-3) 1 1 (R) (1,230)

Common stock (22) (4) (E) 4 (22)

Additional paid-in capital (580) (60) (E) 60 (580)Retained earnings, July 1 (118) 12 12 (E) (118)

Accumulated othercomprehensive income (20) (5) (E) 5 (20)

Treasury stock 8 2 2 (E) 8

Sales revenue (2,000) (900) (2,900)

Equity in income of Saxon (7) -- (C) 7 --

Cost of goods sold 1,400 800 2,200

Goodwill impairment loss -- -- (O-6) 2 2

Other operating expenses 580

_____

88

_____

(O-2) 2(O-4) 1(O-5) 4

3 (O-1)1 (O-3)

_______

____671

$ -0- $ -0- $ 209 $ 209 $ -0-




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(1) Acquisition-date goodwill is calculated as follows:

Acquisition cost (adjusted) $ 110

GOCs book value (40)

Excess of acquisition cost over book value 70

Excess of fair value over book value:

Inventory $ 5Property, plant and equipment (60)

Patents and trademarks 10

Advanced technology 5

Customer lists 25

Long-term debt (3) _(18)

Goodwill $ 88

c.

Consolidated Statement of Income and Retained Earnings For Fiscal 2013

Sales revenue $ 2,900

Costs of goods sold (2,200)Gross margin 700

Operating expenses:

Goodwill impairment loss $ 2

Other operating expenses _671 __673

Net income 27

Retained earnings, beginning balance __118

Retained earnings, ending balance $ 145

Consolidated Balance Sheet, June 30, 2013

Assets

Current assets $ 249

Property, plant and equipment, net 689

Identifiable intangible assets 1,155

Goodwill __81

Total assets $ 2,174


Current liabilities $ 185

Long-term liabilities 1,230

Common stock 22

Additional paid-in capital 580

Retained earnings 145Accumulated other comprehensive income 20

Treasury stock __(8)

Total liabilities and stockholders equity $ 2,174




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P4.8 Working Paper Eliminating Entries, Partial Year Consolidation (see related P3.3)

(all numbers in millions)


Pharmacias reported net income $ 5,000Revaluation writeoffs:

Inventory (2,939)

Property, plant and equipment [$(317)/20] x [8.5/12] 11

In-process research and development (716)

Developed technology rights $31,596/11 x (8.5/12) (2,035)

Long-term debt 12

Other assets $(15,606)/10 x (8.5/12) 1,105

Equity in net income of Pharmacia $ 438

b. Consolidation working paper eliminating entries for 2003:

(C)

Equity in net income of Pharmacia 438

Investment in Pharmacia 438

(E)

Stockholders equityPharmacia,4/16/03 7,236

Investment in Pharmacia 7,236

(R)

Inventory 2,939Long-term investments 40

In-process R&D 5,052

Developed technology rights 37,066

Goodwill 21,304

Property, plant andequipment 317


Other assets 15,606

Investment in Pharmacia 48,637




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b.

Exploration and Production

CGU Value in use Carrying value Impairment loss

UK $ 9,000 $ 1,114 NoneUS 35,000 6,144 None

Rest of world 2,500 2,840 $ 340

Total $ 46,500 $ 10,098

Refining and Marketing

CGU Value in use Carrying value Impairment loss

Refining $ 13,000 $ 1,557 None

Retail 6,000 1,938 None

Lubricants and other 4,000 4,880 $ 880

Total $ 23,000 $ 8,375

Total goodwill impairment loss is $340 + 880 = $1,220

c.

$2,840 2,140 = $700, suggesting a GW impairment loss of that amount. However, total goodwillallocated to the Rest of World CGU is $515. Therefore, the goodwill impairment loss is $515, andother assets of the CGU would be written down, based on appropriate impairment tests.

d.

U.S. GAAP requires goodwill to be assigned to reporting units, in this case Exploration andProduction, and Refining and Marketing. Goodwill is then evaluated using a two-step test.Goodwill is tested for impairment only if the fair value of the reporting unit is less than its carryingvalue. Because fair value is generally calculated using discounted cash flows, we assume it can beapproximated by value in use. For both reporting units above, value in use significantly exceedscarrying value, so no impairment loss is reported.

Because reporting units aggregate CGUs, it is likely that CGUs with carrying value greater thanvalue in use will be offset by those with a value in use that is greater than carrying value whenapplying the first step for impairment testing under U.S. GAAP.




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P4.10 Consolidation One and Two Years after Acquisition

a.

The investment cost underSFAS 141R amounts to $598,000,000 [= ($590,000,000 $15,000,000)

+ $23,000,000], and the $248,000,000 excess of acquisition cost over book value ($598,000,000 $350,000,000) is allocated as follows, with goodwill being the residual at the bottom:

Excess of acquisition cost over book value $ 248,000,000

Allocation to identifiable items:

Inventories (30,000,000)

Identifiable intangibles (5-year life) (40,000,000)

In-process research and development (IPRD) (60,000,000)

Plant assets (20-year life, straight-line) (50,000,000)

Goodwill (unallocated balance) $ 68,000,000

b. 2007 equity income accrual:

Essexs reported net income $ 140,000,000

Revaluation write-offs:

FIFO inventory sold (.4 X $30,000,000) (12,000,000)

Amortization of identifiable intangibles ($40,000,000/5) (8,000,000)

Depreciation of plant assets ($50,000,000/20) (2,500,000)

Goodwill impairment (15,000,000)

Equity income accrual $ 102,500,000

December 31, 2007 working paper eliminations:

(C)

Equity income accrual 102,500,000

Dividends S (.55 x$140,000,000) 77,000,000

Investment in S 25,500,000

(E)

Stockholders equity Essex,1/25/07

350,000,000





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(R)

Inventories 30,000,000


In-process research anddevelopment 60,000,000

Plant assets 50,000,000Goodwill 68,000,000


(O)

Cost of goods sold 12,000,000

Amortization expense 8,000,000

Depreciation expense 2,500,000

Goodwill impairment loss 15,000,000

Inventories 12,000,000


Accumulated depreciation2,500,000

Goodwill 15,000,000

c. 2008 equity income accrual:

Essexs reported net income $160,000,000

Revaluation write-offs:

Amortization of identifiable intangibles ($40,000,000/5) (8,000,000)

Depreciation of plant assets ($50,000,000/20) (2,500,000)

IPRD impairment (20,000,000)

Equity income accrual $129,500,000

December 31, 2008, working paper eliminations:(C)

Equity income accrual 129,500,000

Dividends S (.55 x$160,000,000) 88,000,000


(E)

Stockholders equity Essex,1/1/08 (1) 413,000,000


(1) $350,000,000 + $140,000,000 - $77,000,000




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(R)

Inventories (.6 x $30,000,000)18,000,000


In-process research and

development 60,000,000Plant assets 50,000,000

Goodwill 53,000,000

Accum. depreciation 2,500,000


(O)


Depreciation expense 2,500,000

IPRD impairment loss 20,000,000


Accumulated depreciation2,500,000

IPRD 20,000,000

P4.11 Intangibles under IFRS

a.

Whereas the double-declining balance rate is twice the straight-line rate, 150% declining balance is1.5 x 10% straight-line rate, or 15%. Following the conventional declining-balance calculations,

we have this amount of amortization expense for 2011, the second year after acquisition:

Amortization expense = .15 x [50,000,000 (.15 x 50,000,000)] = 6,375,000

b.

At December 31, 2010, the carrying amount is 9,000,000 after 2010 amortization of 1,000,000,and the market value of these intangibles is 9,500,000.

December 31, 2010 entries are:

Amortization expense 1,000,000Intangible assets 1,000,000

Intangible assets 500,000

Revaluation surplus(OCI) 500,000




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December 31, 2011, entries are:


Intangible assets 1,055,555

9,500,000/9 = 1,055,555

Revaluation surplus (OCI) 500,000

Loss 944,445

Intangible assets 1,444,445

At this point the ending carrying amount is 7,000,000 (= 10,000,000 1,000,000 + 500,000 1,055,555 1,444,445], equal to the market value on that date.

c.

IFRS impairment loss = carrying amount greater of (value in use, 15,300,000; market value,

14,000,000) = 17,000,000 15,300,000 = 1,700,000.

U.S. GAAP impairment loss = 0 (sum of undiscounted cash flows 18,000,000 > carrying amount,17,000,000, indicating no impairment).

The two-step test in U.S GAAP removes some potential impairments from consideration. IFRSgoes immediately to an amount lower than the sum of the undiscounted cash flows, and will likelyrecognize more impairment losses over time than U.S. GAAP.

P4.12 Consolidation in First Year, Intangible Asset Issues

(all dollar amounts in millions)

a.

Net Assets = Assets - Liabilities$26,900 = $(20,800 + 9,400 + 4,800) LiabilitiesLiabilities = $35,000 $26,900Liabilities = $8,100

b.

Going by the book, the question is simply whether useful lives can be reasonably estimated orwhether the intangible has an obviously very long indeterminate (indefinite) life. Many cases willbe clear-cut and can be justified to the auditors but others will be in gray areas such that the desiredreporting result will call forth the case justifying the classification of the intangible one way oranother.




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In these gray areas, management may elect to minimize periodic amortization charges againstearnings and take their chances on the somewhat random and very subjective impairment tests. Tothe extent possible, management would likely classify items and load cost in the indefinite-livedcategory to minimize the effect on earnings.

c.

With goodwill no longer being subject to amortization, and impairment charges being part ofincome from continuing operations, companies may seek to lower the probability that they willhave to recognize goodwill impairment charges. The subjectivity inherent in valuing the reportingunits to which the goodwill is assignedcash flow forecasts and discount rate selectionsfacilitates decisions to load goodwill onto reporting units that are less-likely impairmentcandidates, i.e., units with fair value significantly above carrying value.

d.

Revaluation of limited-life intangibles is $2,000 (= $3,000 $1,000).Amortization of this revaluation for 2007 = $2,000/15 x 9/12 = $100.Equity method income = $1,000 $100 = $900

Consolidation Working Paper Entries:

(C)

Equity income 900

DividendsCaremark 550

Investment in Caremark 350

(E)Stockholders equityCaremark (1) 1,700

Investment in Caremark 1,700

(1) $26,900 $20,800 ($9,400 $5,000)

(R)

Goodwill 20,800

Identifiable intangibles, limited life 2,000

Identifiable intangibles, indefinite life(2) 2,400

Investment in Caremark 25,200

(2) $6,400 $4,000

(O)

Amortization expense 100

Identifiable intangibles,limited life 100




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AdvAcct Chapter04 Solutions 07.13

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