Advanced accounting ch 3 hw PDF

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Advanced accounting ch 3 hw -If no legal, regulatory, contractual, competitive, economic, or other factors limit the life of an intangible asset, the asset’s assigned value is allocated to expense over… INDEFINIATELY. There is no amortization with an impairment review until its life becomes finite. An intangible asset with an indefinite life is tested annually for impairment and is not amortized, ex: goodwill and trademarks are intangible assets that fall into this category. -Goodwill recognized in a business combination must be allocated among a firm’s identified reporting units. If the fair value of a particular reporting unit with recognized goodwill falls below its carrying amount, which of the following is true? A goodwill impairment loss is recognized for the excess of a reporting unit's carrying amount over its fair value, not to exceed the carrying amount of goodwill.

-On January 1, 2016, Phoenix Co. acquired 100 percent of the outstanding voting shares of Sedona Inc. for $600,000 cash. At January 1, 2016, Sedona’s net assets had a total carrying amount of $420,000. Equipment (eight-year remaining life) was undervalued on Sedona’s financial records by $80,000. Any remaining excess fair over book value was attributed to a customer list developed by Sedona (four-year remaining life), but not recorded on its books. Phoenix applies the equity method to account for its investment in Sedona. Each year since the acquisition, Sedona has declared a $20,000 dividend. Sedona recorded net income of $70,000 in 2016 and $80,000 in 2017. Selected account balances from the two companies’ individual records were as follows: Phoenix Sedona 498,00 285,00 2018 Revenues $ $ 0 0 350,00 195,00 2018 Expenses 0 0 2018 Income from 55,000 Sedona Retained earnings 250,00 175,00 12/31/18 0 0 What is the consolidated net income for Phoenix and Sedona for 2018? =203,000 Step 1: Rev of P = 498,000 (given) less Expenses of P= (350,000) (given) = Net Income of P= 148,000 plus Equity income from S= 55,000 (given) Consolidated NI = 203,000 What is Phoenix’s consolidated retained earnings balance at December 31, 2018?= 250,000 -Paar Corporation bought 100 percent of Kimmel, Inc., on January 1, 2015. On that date, Paar’s equipment (10-year remaining life) has a book value of $420,000 but a fair value of $520,000. Kimmel has equipment (10-year remaining life) with a book value of $272,000 but a fair value of $400,000. Paar uses the equity method to record its investment in Kimmel. On December 31, 2017, Paar has equipment with a book value of $294,000 but a fair value of $445,200. Kimmel has equipment with a book value of $190,400 but a fair value of $357,000. What is the consolidated balance for the Equipment account as of December 31, 2017? = 574,000 Paar’s equipment book value—12/31/17 $294,000 Kimmel’s equipment book value—12/31/17 190,400 Original acquisition-date allocation to Kimmel's equipment:

($400,000 − $272,000) 128,000 Amortization of allocation: ($128,000 ÷ 10 years for 3 years) (38,400) Consolidated equipment $574,000

-On January 1, 2018, Jay Company acquired all the outstanding ownership shares of Zee Company. In assessing Zee’s acquisition-date fair values, Jay concluded that the carrying value of Zee’s longterm debt (8-year remaining life) was less than its fair value by $20,000. At December 31, 2018, Zee Company’s accounts show interest expense of $12,000 and long-term debt of $250,000. What amounts of interest expense and long-term debt should appear on the December 31, 2018, consolidated financial statements of Jay and its subsidiary Zee? a. b. c. d.

Interest expense $14,500 $14,500 $9,500 $9,500

Long-term debt $270,000 $267,500 $270,000 $267,500

Interest expense is reduced by $2,500 resulting from the acquisition-date fair value of long-term debt allocation. The debt is increased by $20,000 less $2,500 (1 year of interest amortization). Answer = option d

-When should a consolidated entity recognize a goodwill impairment loss? If both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying amounts.

-Destin Company recently acquired several businesses and recognized goodwill in each acquisition. Destin has allocated the resulting goodwill to its three reporting units: Sand Dollar, Salty Dog, and Baytowne. Destin opts to skip the qualitative assessment and therefore performs a quantitative goodwill impairment review annually. In its current year assessment of goodwill, Destin provides the following individual asset and liability values for each reporting unit: Carrying Fair Amounts Values Sand Dollar 201,80 Tangible assets $ 190,000 $ 0 212,30 Trademark 238,000 0 136,20 Customer list 126,000 0 Goodwill 135,550 ? (33,50 Liabilities (33,500) ) 0 Salty Dog 284,00 Tangible assets $ 284,000 $ 0 Unpatented 158,00 205,000 technology 0 130,70 Licenses 115,000 0 Goodwill 213,650 ? Baytowne

Tangible assets

$

160,500 $

Unpatented technology Copyrights Goodwill

0 71,750 138,500

179,30 0 137,25 0 103,95 0 ?

The fair values for each reporting unit (including goodwill) are $631,550 for Sand Dollar, $791,700 for Salty Dog, and $704,500 for Baytowne. To date, Destin has reported no goodwill impairments. a. Determine which of Destin’s reporting units require both steps to test for goodwill impairment. b. How much goodwill impairment should Destin report this year? Goodwill impairment test—Step 1 Total fair Carrying Potential goodwill value value impairment Sand 631,55 656,05 Yes $

0 e 0

b. Goodwill impairment test—Step 2 (Sand Dollar and Salty Dog only) 631,55 $ 0

Sand Dollar—total fair value Fair values of identifiable net assets Tangible assets

$

Trademark Customer list Liabilities

201,80 0 212,30 0 136,20 0 (33,50 0)

Implied value of goodwill Carrying value of goodwill Impairment loss

516,80 0 114,75 0 135,55 0 $20,800 791,70 $ 0

Salty Dog—total fair value Fair values of identifiable net assets Tangible assets Unpatented technology Licenses

$

284,00 0 158,00 0 130,70 0

572,70 0

219,00 0 213,65 0

Implied value of goodwill Carrying value of goodwill No impairment—implied value > carry value

0

Acquisition-date fair value allocations (given)

Land Equipment Goodwill Total

$ 40,000 91,000 69,000 $ 200,000

Life -10 yrs. indefinit e

Annual Excess Amortizations -$ 9,100 0 $

9,100

Because Giant uses the equity method, the $141,900 "Equity in Income of Small" reflects a $151,000 equity accrual (100% of Small’s reported earnings) less $9,100 in amortization expense computed above. b Revenues = $1,708,100 (both balances are added together)            

     

Cost of goods sold = $677,000 (both balances are added) Depreciation expense = $348,100 (both balances are added along with excess equipment depreciation) Equity in income of Small = $0 (the parent's Equity in Income of Small balance is removed and replaced with Small's individual revenue and expense accounts) Net income = $683,000 (consolidated expenses are subtracted from consolidated revenues) Retained earnings, 1/1/18 = $1,800,000 (the parent’s balance) Dividends declared = $300,000 (the parent number alone because the subsidiary's dividends are intra-entity) Retained earnings, 12/31/18 = $2,183,000 (the parent’s balance at beginning of the year plus consolidated net income less consolidated dividends declared) Current assets = $981,000 (both book balances are added together while the $17,500 intraentity receivable is eliminated) Investment in Small = $0 (the parent's asset is removed so that Small's individual asset and liability accounts can be brought into the consolidation) Land = $769,000 (both book balances are added together along with the acquisition-date fair value allocation of $40,000) Buildings = $837,000 (both book balances are added together) Equipment = $1,063,500 (both book balances are added plus the unamortized portion of the acquisition-date fair value allocation [$91,000 less $45,500 after 5 years of excess depreciation]) Goodwill = $69,000 (represents the original acquisition-date allocation) Total assets = $3,719,500 (summation of all consolidated assets) Liabilities = $1,286,500 (both balances are added together while the $17,500 intra-entity payable is eliminated) Common stock = $250,000 (parent balance only) Retained earnings, 12/31/18 = $2,183,000 (see above) Total liabilities and equity = $3,719,500 (summation of all consolidated liabilities and equity)

c. GIANT COMPANY AND SMALL COMPANY Consolidation Worksheet For Year Ending December 31, 2018

Accounts Revenues

Consolidation Entries BV BV Giant Small Debit Credit (1,283,1 ) (425,000) 00 554,000 123,000 188,000 151,000 (E) 9,100

Cost of goods sold Depreciation expense Equity income of (141,900) 0 (I) 141,900 Small Net income (683,000) (151,000) Retained earnings 1/1 Net income (above)

300,000

Retained earnings 12/31

(2,183,0 ) (685,000) 00

Current assets

749,500 1,009,50 0

Investment in Small

Land

508,000

Buildings (net)

353,000

Equipment (net)

668,000

Goodwill

0

Total assets

3,288,00 0

Liabilities Common stock Retained earnings (above) Total liabilities and equity

(855,000) (250,000) (2,183,0 ) 00 (3,288,0 ) 00

677,000 348,100

(683,000) (1,800,000) (683,000) (D 100,000 )

100,000

(1,708,100)

0

(1,800,0 ) (634,000) (S) 634,000 00 (683,000) (151,000)

Dividends declared

Consolidated Totals

300,000 (2,183,000)

249,000

(P) 17,500 (D 100,000 (S) 804,000 0 ) (A 163,600 ) (I) 141,900 (A 40,000 221,000 ) 484,000 (A 54,600 (E) 9,100 350,000 ) (A 69,000 0 ) 1,304,00 0

981,000 0

769,000 837,000 1,063,500 69,000 3,719,500

(449,000) (P) 17,500 (170,000) (S) 170,000

(1,286,500) (250,000)

(685,000)

(2,183,000)

(1,304,0 ) 00

1,236,1 00

1,236,1 00

(3,719,500)

Consolidation entries: (S) Elimination of Small’s stockholders’ equity January 1 balances and the book value portion of investment account. (A) Allocation of Small’s excess acquisition-date fair value over book value, unamortized balance as of beginning of year. (I) Elimination of parent's equity in subsidiary's income. (E) Recognition of current year excess fair-value amortization and depreciation expenses. (D) Elimination of intra-entity dividend payment. (P) Elimination of intra-entity receivable/payable....