Stockholders of Acme Company, Baltic Company, and Colt Company are considering
alternative arrangements for a business combination. Balance sheets and the fair values of
each company's assets on October 1, 2004, were as follows:
Acme Baltic Colt
Assets $3,900,000 $7,500,000 $950,000
Liabilities $2,030,000 $2,200,000 $260,000
Common stock, $20 par value $2,000,000 $1,800,000 $540,000
Other contributed capital --0-- $ 600,000 $190,000
Retained earnings(deficit) ($130,000) $2,900,000 $ (40,000)
Total equities $3,900,000 $7,500,000 $950,000
Fair values of assets $4,200,000 $9,000,000 $1,300,000
Acme Company shares have a fair value of $50. A fair (market) price is not available for shares of the other companies because they are closely held. Fair values of liabilities equal book values.
Required:
a. Prepare a balance sheet for the business combination. Assume the following:
Acme Company acquires all the assets and assumes all the liabilities of Baltic and Colt
Companies by issuing in exchange 140,000 shares of its common stock to Baltic Company
and 40,000 shares of its common stock to Colt Company.
b. Assume, further, that the acquisition was consummated on October 1, 2014, as described above. However, by the end of 2015, Acme was concerned that the fair values of one or both of the acquired units had deteriorated. To test for impairment, Acme decided to measure goodwill impairment using the present value of future cash flows to estimate the fair value of the reporting units (Baltic and Colt). Acme accumulated the following data:
Year 2015 Present Value of Future Cash Flows Carrying Value of Identifiable Net Assets* Fair Value Identifiable Net Assets
Baltic $6.500.000 $6.340.000 $6.350.000
Colt $1.900.000 $1.200.000 $1.000.000
* Identifiable Net Assets do not include goodwill.
Prepare the journal entry, if needed, to record goodwill impairment at December 31, 2015.
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a. To prepare the balance sheet for the business combination, we need to combine the assets and liabilities of Acme, Baltic, and Colt Companies.
Acme Company's balance sheet:
Assets Liabilities and Equity
Common stock $2,000,000
Other contributed capital --0--
Retained earnings (deficit) ($130,000)
Total equity $1,870,000
Baltic Company's balance sheet:
Assets Liabilities and Equity
Common stock $1,800,000
Other contributed capital $600,000
Retained earnings (deficit) $2,900,000
Total equity $5,300,000
Colt Company's balance sheet:
Assets Liabilities and Equity
Common stock $540,000
Other contributed capital $190,000
Retained earnings (deficit) ($40,000)
Total equity $690,000
Combined balance sheet:
Assets Liabilities and Equity
Cash $--0--
Accounts receivable --------
Inventory --------
Property, plant, and equipment $13,100,000
Less: Accumulated depreciation ------
Net property, plant, and equipment --------
Goodwill --------
Total assets $13,100,000
Accounts payable --------
Accrued liabilities --------
Long-term liabilities --------
Common stock $4,340,000
Other contributed capital --------
Retained earnings (deficit) --------
Total equity --------
b. To record goodwill impairment at December 31, 2015:
Dr. Goodwill Impairment $1,000,000
Cr. Accumulated Impairment Losses $1,000,000
This journal entry will record the impairment of goodwill based on the decrease in fair value of the reporting unit.
To prepare a balance sheet for the business combination in part a, we need to consolidate the balance sheets of Acme, Baltic, and Colt Companies.
a) Balance Sheet for the Business Combination:
Assets:
Acme Company: $4,200,000 (Fair value of assets)
Baltic Company: $9,000,000 (Fair value of assets)
Colt Company: $1,300,000 (Fair value of assets)
Total Assets: $14,500,000
Liabilities:
Acme Company: $2,030,000 (Liabilities)
Baltic Company: $2,200,000 (Liabilities)
Colt Company: $260,000 (Liabilities)
Total Liabilities: $4,490,000
Equity:
Acme Company:
Common stock: $2,000,000
Other contributed capital: $0
Retained earnings(deficit): ($130,000)
Baltic Company:
Common stock: $1,800,000
Other contributed capital: $600,000
Retained earnings(deficit): $2,900,000
Colt Company:
Common stock: $540,000
Other contributed capital: $190,000
Retained earnings(deficit): ($40,000)
Total Equity: $4,260,000
Total Liabilities and Equity: $14,500,000
To acquire Baltic and Colt Companies, Acme Company issued 140,000 shares of its common stock to Baltic Company and 40,000 shares of its common stock to Colt Company. These shares will be recorded as a part of Acme's equity.
b) Journal Entry for Goodwill Impairment at December 31, 2015:
To record goodwill impairment, we need to compare the carrying value of the identifiable net assets with the fair value of identifiable net assets for each reporting unit (Baltic and Colt).
For Baltic:
Goodwill Impairment = Carrying value of identifiable net assets - Fair value of identifiable net assets
= $6,340,000 - $6,350,000
= -$10,000 (negative implies no impairment)
For Colt:
Goodwill Impairment = Carrying value of identifiable net assets - Fair value of identifiable net assets
= $1,200,000 - $1,000,000
= $200,000
So, only Colt Company has a goodwill impairment.
The journal entry to record the goodwill impairment at December 31, 2015, would be:
Dr. Impairment Expense - Goodwill: $200,000
Cr. Accumulated Impairment - Goodwill: $200,000
Please note that the above calculations assume that Acme uses the two-step impairment test required under the generally accepted accounting principles (GAAP). However, it would be best to consult the specific accounting standards and regulations applicable to your jurisdiction for precise guidance on impairment testing.