CHAPTER 4 SOLUTIONS TO MULTIPLE CHOICE QUESTIONS, EXERCISES AND PROBLEMS MULTIPLE CHOICE QUESTIONS 1.
b Goodwill at the date of acquisition is $10,000,000 ( = $16,000,000 – 4,000,000 + 8,000,000 – 10,000,000). Goodwill at 1/1/14 is $10,000,000 – 2,000,000 = $8,000,000. Land, buildings and equipment revaluation at 1/1/14 is a credit of $8,000,000 – [3 x (8,000,000/20)] = $(6,800,000). Intangibles revaluation at 1/1/14 = $10,000,000 – [3 x ($10,000,000/5)] = $4,000,000. Eliminating entry R is as follows: Goodwill Identifiable intangibles
8,000,000 4,000,000 Land, buildings and equipment Investment in Salem
2.
b Eliminating entry O is as follows: Operating expenses Land, buildings and equipment
2,100,000 400,000 Goodwill Identifiable intangibles
3.
6,800,000 5,200,000
500,000 2,000,000
a Calculation of Equity in Net Income: Salem’s reported net income Revaluation writeoffs: Land, buildings and equipment depreciation Identifiable intangibles amortization Goodwill impairment loss Equity in income of Salem
Solutions Manual, Chapter 4
$ 2,500,000 400,000 (2,000,000) (500,000) $ 400,000
©Cambridge Business Publishers, 2013 1
4.
c Original cost Change in Salem’s retained earnings to 1/1/14 3 years land, buildings and equipment depreciation 3 years identifiable intangibles amortization Goodwill impairment loss to 1/1/14 Investment balance, 1/1/14 Equity in net income, 2014 Investment balance, 12/31/14
5.
c Book value > undiscounted cash flows? Fair value Book value Impairment loss
6.
Customer lists No --
Brand names Yes $3,400,000 5,200,000 $1,800,000
d Step one: Division book value > fair value? Step two: Fair value of goodwill Book value of goodwill Impairment loss
7.
$ 16,000,000 14,000,000 1,200,000 (6,000,000) (2,000,000) 23,200,000 400,000 $23,600,000
Division 1 Yes
Division 2 Yes
$1,000,000 1,600,000 $ 600,000
$8,000,000 6,400,000 -0-
Division 1 $14,000,000 16,000,000 2,000,000 $ 1,600,000
Division 2 $20,000,000 24,000,000 4,000,000 $ 4,000,000
c Fair value of division Book value of division Potential goodwill impairment Actual impairment loss
©Cambridge Business Publishers, 2013 2
Advanced Accounting, 2nd Edition
8.
d Fair value Book value Impairment loss
9.
a
10.
a
Customer lists $1,200,000 1,500,000 $ 300,000
Brand names $3,400,000 5,200,000 $1,800,000
$500,000 – 100,000 = $400,000.
Solutions Manual, Chapter 4
©Cambridge Business Publishers, 2013 3
EXERCISES E4.1
Equity Method Accounting
Calculation of Equity in Net Income: Johnson’s reported net income Revaluation writeoffs: Plant assets $50,000,000/25 Goodwill impairment loss Equity in net income of Johnson Entries made by George during 2013: Investment in Johnson Capital stock Investment in Johnson
$ 85,000,000 (2,000,000) (20,000,000) $ 63,000,000 500,000,000 500,000,000 63,000,000
Equity in net income of Johnson Cash
63,000,000 30,000,000
Investment in Johnson E4.2
30,000,000
Equity Method Income and Working Paper Eliminations
(all amounts in millions) a.
Investment balance, 1/1/14 Investment balance, 1/1/13 = $2,000 + $200 Change 2013 dividends 2013 equity income accrual Writeoff of plant asset revaluation = ($160/10) Saber’s 2013 net income
$2,286 2,200 86 60 146 16 $ 162
b.
Saber’s stockholders’ equity, 1/1/13 2013 net income 2013 dividends Saber’s stockholders’ equity, 1/1/14
$2,000 162 (60) $2,102
c.
Saber’s 2014 net income Extra depreciation on revalued plant assets Equity income accrual
$ 130 (16) $ 114
©Cambridge Business Publishers, 2013 4
Advanced Accounting, 2nd Edition
d.
(C) Equity income accrual
(E) Stockholders’ Equity – Saber Investment in Saber (R) Plant assets, net Goodwill (O) Depreciation expense e.
114
Dividends – Saber Investment in Saber
2,102
144 40
Investment in Saber
16
Plant assets, net
40 74
2,102
184
16
At the beginning of 2025, the plant assets are fully depreciated and the remaining balance for goodwill is $40 - $30 = $10. (R) Goodwill
10 Investment in S
10
Entry (O) is not needed since no revaluations are written off in 2025.
Solutions Manual, Chapter 4
©Cambridge Business Publishers, 2013 5
E4.3
Consolidation at End of First Year
a.
The acquisition entry is as follows: Investment in Saddlestone Merger expenses Capital stock Contingent consideration liability Cash
10,300,000 250,000 10,000,000 300,000 250,000
Calculation of 2013 equity in net income: Saddlestone’s reported net income Revaluation writeoff: Identifiable intangibles $2,000,000/5 Equity in net income of Saddlestone Peak’s equity method entries for 2013: Investment in Saddlestone Equity in net income of Saddlestone Cash
$ 3,000,000 (400,000) $ 2,600,000 2,600,000 2,600,000 1,000,000
Investment in Saddlestone b.
Calculation of goodwill is as follows: Acquisition cost Book value of Saddlestone Excess of acquisition cost over book value Identifiable intangibles Goodwill Consolidation working paper eliminating entries for 2013: (C) Equity in net income of Saddlestone Dividends – Saddlestone Investment in Saddlestone (E) Stockholders’ equity— Saddlestone, 1/1
$ 10,300,000 (7,200,000) 3,100,000 (2,000,000) $ 1,100,000
2,600,000 1,000,000 1,600,000
7,200,000 Investment in Saddlestone
©Cambridge Business Publishers, 2013 6
1,000,000
7,200,000
Advanced Accounting, 2nd Edition
E4.3
continued (R) Identifiable intangibles Goodwill
2,000,000 1,100,000 Investment in Saddlestone
3,100,000
(O) Amortization expense
400,000 Identifiable intangibles
E4.4
Eliminating Entries after First and Second Years
a.
Calculation of equity in net income for 2014:
400,000
Safeco’s reported net income Revaluation writeoffs: Equipment $500,000/5 Inventory Goodwill impairment loss Equity in net income of Safeco
$ 1,600,000 (100,000) (200,000) (50,000) $ 1,250,000
Peerless’s entries for 2014: Investment in Safeco
8,000,000 Cash
8,000,000
Investment in Safeco
1,250,000 Equity in net income of Safeco
1,250,000
Cash
600,000 Investment in Safeco
600,000
Calculation of goodwill is as follows: Acquisition cost Book value of Safeco Excess of acquisition cost over book value Fair value less book value: Equipment Inventory Goodwill
Solutions Manual, Chapter 4
$
$
500,000 200,000 $
8,000,000 (7,000,000) 1,000,000 (700,000) 300,000
©Cambridge Business Publishers, 2013 7
E4.4
continued Consolidation working paper eliminating entries for 2014: (C) Equity in net income of Safeco
1,250,000 Dividends – Safeco Investment in Safeco
600,000 650,000
(E) Stockholders’ equity—Safeco, 1/1
7,000,000 Investment in Safeco
7,000,000
(R) Equipment, net Inventory Goodwill
500,000 200,000 300,000 Investment in Safeco
1,000,000
(O) Depreciation expense Cost of goods sold Goodwill impairment loss
100,000 200,000 50,000 Equipment, net Inventory Goodwill
b.
100,000 200,000 50,000
Calculation of equity in net income for 2015: Safeco’s reported net income Revaluation writeoff: Equipment $500,000/5 Equity in net income of Safeco
$ 2,000,000 (100,000) $ 1,900,000
Peerless’s equity method entries for 2015: Investment in Safeco
1,900,000 Equity in net income of Safeco
Cash
800,000 Investment in Safeco
©Cambridge Business Publishers, 2013 8
1,900,000 800,000
Advanced Accounting, 2nd Edition
E4.4
continued The Investment in Safeco balance at December 31, 2015 is $8,000,000 + 1,250,000 – 600,000 + 1,900,000 – 800,000 = $9,750,000. Consolidation working paper eliminating entries for 2015: (C) Equity in net income of Safeco
1,900,000 Dividends – Safeco Investment in Safeco
(E) Stockholders’ equity—Safeco, 1/1
800,000 1,100,000
8,000,000
Investment in Safeco 8,000,000 Stockholders’ equity—Safeco at 1/1/2015 = $7,000,000 + 1,600,000 – 600,000 = $8,000,000 (R) Equipment, net Goodwill
400,000 250,000 Investment in Safeco
(O) Depreciation expense
100,000 Equipment, net
Solutions Manual, Chapter 4
650,000
100,000
©Cambridge Business Publishers, 2013 9
E4.5
Equity Method, Eliminating Entries, Several Years after Acquisition
a.
Calculation of total goodwill is as follows: Acquisition cost Book value of Oslo Excess of acquisition cost over book value Fair value less book value: Land Buildings Identifiable intangibles Long-term debt Goodwill
b.
$
450,000 (400,000) 1,000,000 250,000
6,000,000 (2,500,000) 3,500,000
(1,300,000) $ 2,200,000
Calculation of Equity in net income for 2014: Oslo’s reported net income Revaluation writeoffs: Buildings $(400,000)/20 Long-term debt $250,000/10 Goodwill impairment loss Equity in net income of Oslo
c.
$
$ 450,000 20,000 (25,000) (60,000) $ 385,000
Calculation of Investment in Oslo, 12/31/14 Investment in Oslo, 1/1/06 Oslo’s reported income, 2006-2013 Oslo’s reported dividends, 2006-2013 Revaluation writeoffs, 2006-2013: Buildings $[(400,000)/20] x 8 Identifiable intangibles (full balance) Long-term debt $[250,000/10] x 8 Goodwill impairment loss Investment in Oslo, 1/1/14 Equity in net income, 2014 Oslo’s dividends, 2014 Investment in Oslo, 12/31/14
©Cambridge Business Publishers, 2013 10
$ 6,000,000 4,000,000 (1,200,000) 160,000 (1,000,000) (200,000) (300,000) 7,460,000 385,000 (100,000) $ 7,745,000
Advanced Accounting, 2nd Edition
E4.5
continued
d.
Consolidation working paper eliminating entries for 2014: (C) Equity in net income of Oslo
385,000 Dividends – Oslo Investment in Oslo
(E) Stockholders’ equity—Oslo, 1/1
100,000 285,000 5,300,000
Investment in Oslo 5,300,000 Stockholders’ equity, January 1, 2014 = $2,500,000 + 4,000,000 – 1,200,000 = $5,300,000. (R) Land Long-term debt Goodwill
450,000 50,000 1,900,000
Investment in Oslo 2,160,000 Buildings, net 240,000 Revaluations at January 1, 2014 = original revaluations less writeoffs for 2006-2013. (O) Interest expense Buildings, net Goodwill impairment loss
25,000 20,000 60,000 Long-term debt Depreciation expense Goodwill
Solutions Manual, Chapter 4
25,000 20,000 60,000
©Cambridge Business Publishers, 2013 11
E4.6
Consolidation after Several Years
Calculation of total goodwill is as follows: Acquisition cost Book value of Baker Excess of acquisition cost over book value Fair value less book value: Buildings Goodwill
$
7,500,000 (5,000,000) 2,500,000
$
(1,000,000) 1,500,000
$
300,000
$
(40,000) (100,000) 160,000
Calculation of equity in net income for 2013: Baker’s reported net income Revaluation writeoffs: Buildings $1,000,000/25 Goodwill impairment loss Equity in net income of Baker Calculation of investment balance at December 31, 2013: Investment in Baker, 12/31/06 Baker reported income, 2007-2012 Baker reported dividends, 2007-2012 Revaluation writeoffs, 2007-2012: Buildings ($1,000,000/25) x 6 Investment in Baker, 1/1/13 Equity in net income, 2013 Dividends, 2013 Investment in Baker, 12/31/13
$ 7,500,000 1,300,000 (400,000) (240,000) 8,160,000 160,000 (100,000) $ 8,220,000
Consolidation working paper eliminating entries for 2013: (C) Equity in net income of Baker
160,000 Dividends – Baker Investment in Baker
(E) Stockholders’ equity—Baker, 1/1
100,000 60,000 5,900,000
Investment in Baker 5,900,000 Stockholders’ equity, January 1, 2013 = $5,000,000 + 1,300,000 – 400,000 = $5,900,000.
©Cambridge Business Publishers, 2013 12
Advanced Accounting, 2nd Edition
E4.6
continued
(R) Buildings, net Goodwill
760,000 1,500,000
Investment in Baker 2,260,000 Revaluations at January 1, 2013 = original revaluations less writeoffs for 2007-2012. (O) Depreciation expense Goodwill impairment loss
40,000 100,000 Buildings, net Goodwill
40,000 100,000
E4.7
Goodwill Impairment Losses
a.
Goodwill is not a standalone asset, but represents the value of above-average future performance potential that cannot be assigned to identifiable assets such as property or specific intangible assets. Because performance potential is related to business operations, to measure impairments in its value it must be connected with a specific business unit. In the case of Time Warner, as discussed in the text of Chapter 4, goodwill is assigned to “Networks” as a business unit. The WB Network was one part of this business unit, but did not comprise the entire unit.
b.
First, Time Warner has the option to perform a qualitative analysis to determine if it is more likely than not that the business unit’s book value exceeds its fair value. If so, the fair value of the business unit is calculated and compared with its book value. If book value exceeds fair value, we determine the amount of the impairment, if any, by comparing the fair value of the goodwill with its book value. An impairment loss is reported if book value exceeds fair value. Since The WB Network was shut down, its future performance will no longer benefit Time Warner, and the impairment charge is appropriate. Had the qualitative assessment option been available in 2006, Time Warner would likely have bypassed this option due to strong indicators that The WB Network’s future cash flows were significantly impaired.
c.
Time Warner has a 50% interest in The CW, so under U.S. GAAP it does not have a controlling interest and reports its investment using the equity method. Time Warner’s equity in the net income of The CW is reported as part of consolidated other income. The investment balance is reported as part of consolidated assets. The CW’s individual assets, liabilities, revenues and expenses are not reported on the consolidated financial statements.
Solutions Manual, Chapter 4
©Cambridge Business Publishers, 2013 13
E4.8
Projecting Consolidation Entries
a. (R) Land Equipment, net
80,000 18,000
Investment 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) Depreciation expense
6,000 Equipment, net
b. (R) Land
6,000
80,000 Investment in Samson
80,000
Inventory has been sold, and the equipment revaluation has been completely written off. Therefore no eliminating entry (O) is appropriate. c.
No eliminating entries are necessary to recognize or write off the revaluations, because the assets requiring revaluation have been either sold or written off.
©Cambridge Business Publishers, 2013 14
Advanced Accounting, 2nd Edition
E4.9
Identifiable Intangibles and Goodwill, U.S. GAAP
Amortization expense for 2014: Customer relationships Favorable leaseholds Total
$4,000,000/4 $8,000,000/5
$ 1,000,000 1,600,000 $2,600,000
Impairment testing – identifiable intangibles: Customer relationships Book value = $4,000,000 – 2 x ($4,000,000/4) = $2,000,000 Book value > Sum of undiscounted cash flows? $2,000,000 > $1,200,000: Yes Impairment loss = $2,000,000 - $900,000 = $1,100,000 Favorable leaseholds Book value = $8,000,000 – 1.5 x ($8,000,000/5) = $5,600,000 Book value > Sum of undiscounted cash flows? $5,600,000 < $6,000,000: No Brand names Book value = $18,000,000 Book value > Sum of discounted cash flows? $18,000,000 > $7,000,000: Yes Impairment loss = $18,000,000 - $7,000,000 = $11,000,000 Impairment testing – Goodwill: Reporting Unit
Unit FV < BV?
Fair Value of GW
GW impairment loss
Asia
$400,000,000 > $300,000,000: No $350,000,000> $200,000,000: No $500,000,000< $600,000,000: Yes
$500,000,000 – 385,000,000 = 115,000,000
$250,000,000 – 115,000,000 = $135,000,000
South America Europe
Summary: Amortization expense – identifiable intangibles Impairment losses – identifiable intangibles Goodwill impairment loss Total
Solutions Manual, Chapter 4
$
2,600,000 12,100,000 135,000,000 $149,700,000
©Cambridge Business Publishers, 2013 15
E4.10 Identifiable Intangibles and Goodwill, IFRS Amortization expense for 2014: Customer relationships Favorable leaseholds Total
$4,000,000/4 $8,000,000/5
$ 1,000,000 1,600,000 $2,600,000
Impairment testing – identifiable intangibles: Customer relationships Book value = $4,000,000 – 2 x ($4,000,000/4) = $2,000,000 Book value > Sum of discounted cash flows? $2,000,000 > $900,000: Yes Impairment loss = $2,000,000 - $900,000 = $1,100,000 Favorable leaseholds Book value = $8,000,000 – 1.5 x ($8,000,000/5) = $5,600,000 Book value > Sum of discounted cash flows? $5,600,000 > $4,400,000: Yes Impairment loss = $5,600,000 – $4,400,000 = $1,200,000 Brand names Book value = $18,000,000 Book value > Sum of discounted cash flows? $18,000,000 > $7,000,000: Yes Impairment loss = $18,000,000 - $7,000,000 = $11,000,000 Impairment testing – Goodwill: Reporting Unit
Unit FV < BV?
GW impairment loss
E. Asia
$150,000,000 < $200,000,000: Yes
$200,000,000 – 150,000 = $50,000,000; impairment limited to full goodwill balance of $40,000,000.
Indonesia Brazil Mediterranean
$120,000,000 > $100,000,000: No $140,000,000 >$130,000,000: No $190,000,000 < $220,000,000: Yes
Scandinavia
$230,000,000 < $300,000,000: Yes
Summary: Amortization expense – identifiable intangibles Impairment losses – identifiable intangibles Goodwill impairment loss Total
©Cambridge Business Publishers, 2013 16
$220,000,000 – 190,000,000 = $30,000,000 $300,000,000 – 230,000,000 = $70,000,000
$
2,600,000 13,300,000 140,000,000 $155,900,000
Advanced Accounting, 2nd Edition
E4.11 Consolidated Income Statement a. (amounts in millions) Sales $5,000 + 2,000 Cost of goods sold $3,000 + 800 + 160 Gross margin Depreciation expense $500 + 140 – (200/10) Interest expense $100 + 60 + (100/5) Other expenses $600 + 700 Total operating expenses Net income b.
$7,000 3,960 3,040 620 180 1,300 2,100 $ 940
Parson reports its own income of $800 million plus its equity in the income of Soaper of $140 million. Equity in the income of Soaper is Soaper’s reported income adjusted for write-offs of Soaper’s net asset revaluations. Consolidated income is Parson’s and Soaper’s reported revenues and expenses, with Soaper’s expenses adjusted for the revaluation writeoffs. Parson’s separately reported income and consolidated income therefore report the same items, packaged differently.
Solutions Manual, Chapter 4
©Cambridge Business Publishers, 2013 17
E4.12 Amortization and Impairment Testing of Identifiable Intangible Assets a. Technology Arroyo WebEx
$15,000/5 x 9/12 = $312,000/4 x 1/12 =
Customer Relationships Arroyo WebEx
$14,000/7 x 9/12 = $153,000/6 x 1/12 =
$
2,250 6,500 1,500 2,125
Total amortization expense
$ 12,375
b. Technology Arroyo WebEx Customer Relationships Arroyo WebEx
7/31/07 Book value> Book Undiscounted value cash flows? $ 12,750 $12,750>$14,000? No 305,500 $305,500>$300,000? Yes
12,500 $12,500>$16,000? No 150,875 $150,875>$140,000? Yes
Impairment loss --$305,500-250,000 = $ 55,500
-$150,875-100,000 =
Total impairment loss
-50,875 $106,375
c. Arroyo WebEx 7/31/07 book value
©Cambridge Business Publishers, 2013 18
Technology $ 12,750 250,000 $ 262,750
Customer Relationships $ 12,500 100,000 $ 112,500
Advanced Accounting, 2nd Edition
E4.13 Consolidation Using Cost Method Calculation of total goodwill is as follows: Acquisition cost Book value of Baker Excess of acquisition cost over book value Fair value less book value: Buildings Goodwill
$
$
7,500,000 (5,000,000) 2,500,000 (1,000,000) 1,500,000
Calculation of adjustment to investment balance to convert it to complete equity method at January 1, 2013: Baker reported income, 2007-2012 Baker reported dividends, 2007-2012 Revaluation writeoffs, 2007-2012: Buildings ($1,000,000/25) x 6 Adjustment to Investment in Baker, 1/1/13
$ 1,300,000 (400,000) (240,000) $ 660,000
Consolidation working paper eliminating entries for 2013: (A) Investment in Baker
660,000 Stockholders’ equity –Adam
(C) Dividend income – Adam
660,000 100,000
Dividends – Baker (E) Stockholders’ equity—Baker, 1/1
100,000 5,900,000
Investment in Baker 5,900,000 Stockholders’ equity, January 1, 2013 = $5,000,000 + 1,300,000 – 400,000 = $5,900,000. (R) Buildings, net Goodwill
760,000 1,500,000
Investment in Baker Revaluations at January 1, 2013 = original revaluations less writeoffs for 2007-2012. (O) Depreciation expense Goodwill impairment loss
40,000 100,000 Buildings, net Goodwill
Solutions Manual, Chapter 4
2,260,000
40,000 100,000
©Cambridge Business Publishers, 2013 19
PROBLEMS P4.1
Condensed Consolidated Financial Statements One Year after Acquisition
a.
Calculation of equity in net income for 2014: Santo’s reported net income Revaluation writeoffs: Inventory (1) Plant assets $8,000,000/8 Patents $1,500,000/4 Long-term debt $1,000,000/10 Goodwill impairment loss Equity in net income of Santo
$ 5,000,000 (2,000,000) (1,000,000) (375,000) 100,000 (400,000) $ 1,325,000
(1) Santo’s beginning inventory on its own books is $3,000,000 (= $5,200,000 + 4,000,000 – 6,200,000). Since Santo’s cost of goods sold is $4,000,000, its beginning inventory is completely sold in 2014, and the revaluation is written off. b. Consolidation Working Paper, December 31, 2014 Trial Balances Taken From Books Dr (Cr)
Eliminations Consolidated
Ponon
Santo
Cash and receivables Inventory Plant assets, net Investment in Santo
$ 4,500,000 5,000,000 8,000,000 26,325,000
$ 3,100,000 5,200,000 12,000,000 --
Patents Goodwill Current liabilities Long-term debt Capital stock Retained earnings, Jan. 1 Sales Equity in income of Santos Cost of goods sold Depreciation and amortization expense Interest and other expenses GW impairment loss
--(5,100,000) (20,000,000) (8,000,000) (4,800,000) (30,000,000) (1,325,000) 18,000,000 2,000,000
--(2,000,000) (3,300,000) (6,000,000) (4,000,000) (13,200,000) -4,000,000 3,200,000
5,400,000 -$ -0-
1,000,000 -$ -0-
©Cambridge Business Publishers, 2013 20
Dr
Balances
Cr
(R) 2,000,000 (R) 8,000,000
(R) 1,500,000 (R) 4,500,000 (O-4) 100,000 (E) 6,000,000 (E) 4,000,000
2,000,000 (O-1) 1,000,000 (O-2) 1,325,000 (C) 10,000,000 (E) 15,000,000 (R) 375,000 (O-3) 400,000 (O-5) 1,000,000
(R)
(C) 1,325,000 (O-1) 2,000,000 (O-2) 1,000,000 (O-3) 375,000 (O-5) 400,000 $ 31,200,000
100,000 (O-4) _______ $31,200,000
$ 7,600,000 10,200,000 27,000,000 -1,125,000 4,100,000 (7,100,000) (24,200,000) (8,000,000) (4,800,000) (43,200,000) -24,000,000 6,575,000 6,300,000 400,000 $ -0-
Advanced Accounting, 2nd Edition
P4.1
continued
c. Consolidated Statement of Income and Retained Earnings For the Year 2014 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, 2014 Assets Cash and receivables Inventory Plant assets, net Patents Goodwill Total assets Liabilities and stockholders’ equity Current liabilities Long-term debt Capital stock Retained earnings Total liabilities and stockholders’ equity
Solutions Manual, Chapter 4
$
7,600,000 10,200,000 27,000,000 1,125,000 4,100,000 $ 50,025,000 $
7,100,000 24,200,000 8,000,000 10,725,000 $ 50,025,000
©Cambridge Business Publishers, 2013 21
P4.2
Equity Method and Eliminating Entries Three Years after Acquisition
a.
Calculation of equity in net income for 2014: Sunset Coast’s reported net income for 2014 Revaluation writeoffs: Plant assets ($1,000,000)/10 Identifiable intangibles $3,600,000/20 Equity in net income of Sunset Coast
$ 200,000 100,000 (180,000) $ 120,000
Note: Identifiable intangibles at the date of acquisition are $2,100,000 + 500,000 + 1,000,000 = $3,600,000. b.
Calculation of investment balance at December 31, 2014: Investment in Sunset Coast, December 31, 2011 Sunset Coast’s reported income, 2012-2014 Sunset Coast’s reported dividends, 2012-2014 (50% of reported income) Revaluation writeoffs, 2012-2014: Plant assets [($1,000,000)/10] x 3 Identifiable intangibles ($3,600,000/20) x 3 Investment in Sunset Coast, December 31, 2014
$ 3,500,000 850,000 (425,000) 300,000 (540,000) $ 3,685,000
Note to instructor: Under LIFO and increasing inventory, the acquisition date revalued inventory is assumed to still be on hand. c.
Consolidation working paper eliminating entries for 2014: (C) Equity in net income of Sunset Coast
120,000 Dividends – Sunset Coast (.5 x $200,000) Investment in Sunset Coast
©Cambridge Business Publishers, 2013 22
100,000 20,000
Advanced Accounting, 2nd Edition
P4.2
continued (E) Stockholders’ equity—Sunset Coast, 1/1
1,725,000
Investment in Sunset Coast 1,725,000 Sunset Coast’s stockholders’ equity, December 31, 2011 = $1,400,000 (acquisition cost $3,500,000 less excess over book value $2,100,000). Sunset Coast’s stockholders’ equity, January 1, 2014 = $1,400,000 + (1 - .5)(850,000 – 200,000) = $1,725,000. (R) Identifiable intangibles
3,240,000
Inventory 500,000 Plant assets, net 800,000 Investment in Sunset Coast 1,940,000 Revaluations at January 1, 2014 = original revaluations less writeoffs for 2012 and 2013. (O) Plant assets, net Amortization expense
100,000 180,000 Depreciation expense Identifiable intangibles
d.
100,000 180,000
Puffin’s income from its own operations plus equity in net income of Sunset Coast = consolidated net income: $600,000 + $120,000 = $720,000.
Solutions Manual, Chapter 4
©Cambridge Business Publishers, 2013 23
P4.3
Consolidation at End of First Year, Preacquisition Contingency
a.
Calculation of equity in net income for 2013: Sanders’ reported net income for 2013 Revaluation writeoffs: Inventory $80,000 x 60% Equipment $200,000/10 Equity in net income of Sanders Perkins’entries for 2013: Investment in Sanders Merger expenses Restructuring expenses
$ 500,000 (48,000) (20,000) $ 432,000 4,000,000 50,000 100,000
Cash Investment in Sanders
4,150,000 432,000
Equity in net income of Sanders Cash
432,000 150,000
Investment in Sanders b.
150,000
Consolidation working paper eliminating entries for 2013: (C) Equity in net income of Sanders
432,000 Dividends – Sanders Investment in Sanders
(E) Stockholders’ equity— Sanders, 1/1
2,200,000 Investment in Sanders
©Cambridge Business Publishers, 2013 24
150,000 282,000
2,200,000
Advanced Accounting, 2nd Edition
P4.3
Consolidation at End of First Year, Preacquisition Contingency (R) Inventory Equipment, net In-process research and development Goodwill
80,000 200,000 300,000 1,305,000 Lawsuit liability Investment in Sanders
85,000 1,800,000
Note: Because the change in the lawsuit liability occurs within the measurement period, the increased liability value increases acquisition date goodwill. (O) Cost of goods sold Depreciation expense
48,000 20,000 Inventory Equipment, net
P4.4
48,000 20,000
Consolidated Balance Sheet Working Paper, Bargain Purchase (see related P3.4)
(all amounts in millions) a.
Calculation of equity in net income for 2013: Saxon’s reported net income for 2013 ($10,000 + 10 – 8,000 – 40 – 25 – 1,600) Revaluation writeoffs: Inventory Marketable securities Buildings and equipment $300/20 Long-term debt $110/5 Equity in net income of Saxon
$ 345 (100) 50 (15) (22) $ 258
Calculation of Investment balance, December 31, 2013: Investment balance, December 31, 2012 (1) Equity in net income for 2013 Dividends for 2013 Investment balance, December 31, 2013 (1)
$2,000 258 (100) $2,158
Paxon acquired Saxon for $1,800, but there is a bargain gain that increases the investment balance by $200, as follows:
Solutions Manual, Chapter 4
©Cambridge Business Publishers, 2013 25
P4.4
continued
Calculation of gain on acquisition: Acquisition cost Book value ($100 + 350 + 845) Excess of acquisition cost over book value Excess of fair value over book value: Inventory Marketable securities Land Buildings and equipment Long-term debt (discount) Gain on acquisition
$ 1,800 (1,295) 505 $ 100 (50) 245 300 110 $
705 200
Therefore Paxon’s entry to record the acquisition was: Investment in Saxon
2,000 Cash Gain on acquisition
1,800 200
b. Consolidation Working Paper, December 31, 2013 Trial Balances Taken From Books Dr (Cr) Cash and receivables Inventory Marketable securities Investment in Saxon Land Buildings and equipment, net Current liabilities Long-term debt Common stock Additional paid-in capital Retained earnings, Jan. 1 Dividends Sales revenue Equity in income of Saxon Gain on sale of securities Cost of goods sold Depreciation expense Interest expense Other operating expenses
©Cambridge Business Publishers, 2013 26
Paxon
Saxon
$ 3,100 2,260 -2,158
$
650 3,600 (2,020) (5,000) (500) (1,200) (2,610) 500 (30,000) (258) -26,000 300 250 2,770 $ -0-
800 940 ---
300 1,150 (1,200) (450) (100) (350) (845) 100 (10,000) -(10) 8,000 40 25 1,600 $ -0-
Eliminations
Dr (R) 100 (O-2) 50
Consolidated Balances
Cr 100 (O-1) 50 (R) 158 (C) 1,295 (E) 705 (R)
(R) 245 (R) 300
15 (O-3)
(R) 110 (E) 100 (E) 350 (E) 845
22 (O-4)
100
(C)
(C) 258 50 (O-2) (O-1) 100 (O-3) 15 (O-4) 22 ______ $ 2,495
_______ 2,495
$
$ 3,900 3,200 --1,195 5,035 (3,220) (5,362) (500) (1,200) (2,610) 500 (40,000) -(60) 34,100 355 297 4,370 $ -0-
Advanced Accounting, 2nd Edition
P4.4
continued
c. Consolidated Statement of Income and Retained Earnings For the Year 2013 Sales $ 40,000 Costs of goods sold (34,100) Gross margin 5,900 Operating 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 Inventory Land Buildings and equipment, net Total assets Liabilities and stockholders’ equity Current liabilities Long-term debt Common stock Additional paid-in capital Retained earnings Total liabilities and stockholders’ equity
Solutions Manual, Chapter 4
$
3,900 3,200 1,195 5,035 $ 13,330 $
3,220 5,362 500 1,200 3,048 $ 13,330
©Cambridge Business Publishers, 2013 27
P4.5
Goodwill Allocation and Impairment
a. Identifiable assets acquired Liabilities assumed Net identifiable assets acquired Total acquisition cost Total goodwill
$ 60,000,000 (25,000,000) 35,000,000 75,000,000 $ 40,000,000
Allocation to business units: Identifiable assets acquired Liabilities assumed Net assets assigned
Unit X $ 32,000,000 (18,000,000) $ 14,000,000
Unit Y $20,000,000 (6,000,000) $14,000,000
Unit Z $ 8,000,000 (1,000,000) $ 7,000,000
Total $ 60,000,000 (25,000,000) $ 35,000,000
Unit Y $ 30,000,000
Unit Z
Unit J
Fair value of reporting unit
Unit X $ 50,000,000
$20,000,000
Less: Net assets assigned Increase in fair value Tentative allocation of goodwill Total tentative allocation is $80,000,000; goodwill to be assigned is $40,000,000. 50% reduction Allocation of goodwill
©Cambridge Business Publishers, 2013 28
(14,000,000) __ N/A___
(14,000,000) ___N/A___
$ 15,000,000 (7,000,000) ___N/A___
36,000,000
16,000,000
8,000,000
20,000,000
(18,000,000) $ 18,000,000
(8,000,000) $ 8,000,000
(4,000,000) $ 4,000,000
(10,000,000) $10,000,000
Advanced Accounting, 2nd Edition
P4.5
continued
b.
Step 1 of impairment test: Compare the fair value of each reporting unit at December 31, 2014 with its book value at that date. Fair value at December 31, 2014 Book value at December 31, 2014 Difference Preliminary conclusion
Unit X
Unit Y
Unit Z
Unit J
$30,000,000
$ 15,000,000
$ 12,000,000
$ 75,000,000
34,000,000 $( 4,000,000) May be impaired
20,000,000 $(5,000,000) May be impaired
10,000,000 $2,000,000 Not impaired
72,000,000 $(2,000,000) Not impaired
Step 2 of the impairment test: For those reporting units where goodwill may be impaired, calculate the implied fair value of goodwill at December 31, 2014 and compare to the book value of goodwill at that date. Fair value of reporting unit Fair value of identifiable net assets at December 31, 2014 Implied value of goodwill Book value of goodwill Difference Conclusion
Unit X $ 30,000,000
Unit Y $ 15,000,000
23,000,000 7,000,000 18,000,000 $ (11,000,000) Goodwill is impaired
6,000,000 9,000,000 8,000,000 $ 1,000,000 Goodwill is not impaired
Goodwill is impaired for Reporting Unit X. An $11,000,000 goodwill impairment loss should be recorded at December 31, 2014.
Solutions Manual, Chapter 4
©Cambridge Business Publishers, 2013 29
P4.6
Intangible Assets and Goodwill: Amortization and Impairment
2013 amortization expense: Customer lists $500,000/5 Developed technology $800,000/10 Total
$ 100,000 80,000 $ 180,000
2013 impairment test for identifiable intangibles:
Original book value Less: amortization 2011 2012 2013 Book value, December 31, 2013
Customer lists $ 500,000
Developed technology $ 800,000
Internet domain name $ 1,300,000
(100,000) (100,000) (100,000) $ 200,000
(80,000) (80,000) (80,000) 560,000
– – ___–_____ $ 1,300,000
$
Step 1 of impairment test: To determine whether impairment has occurred, compare the undiscounted future cash flows from the asset to its book value.
Future undiscounted cash flows Book value Difference Conclusion
Customer lists $ 250,000 200,000 $ 50,000 Not impaired
Developed technology $ 500,000 560,000 $ (60,000) Impaired
Internet domain name $ 1,000,000 1,300,000 $ (300,000) Impaired
Step 2 of impairment test: For intangibles that are deemed impaired in Step 1, calculate amount of impairment as the difference between discounted cash flows and book value.
Future discounted cash flows Book value Impairment
©Cambridge Business Publishers, 2013 30
Developed technology $ 420,000 560,000 $ 140,000
Internet domain name $ 750,000 1,300,000 $ 550,000
Advanced Accounting, 2nd Edition
P4.6
continued
2013 goodwill impairment test: Step 1 of impairment test: compare fair value of reporting unit at December 31, 2013 to the book value of the unit at that date. Fair value of reporting unit Book value Difference
$17,000,000 18,500,000 $(1,500,000)
Conclusion: Goodwill may be impaired. Step 2 of impairment test: Calculate the implied fair value of goodwill at December 31, 2013 and compare to the book value at that date. Fair value of reporting unit Fair value of identifiable net assets Implied fair value of goodwill Book value of goodwill Difference
$ 17,000,000 14,200,000 2,800,000 6,200,000 $ (3,400,000)
Conclusion: Goodwill impairment loss is $3,400,000. Summary: Amortization expense for 2013: Customer lists Developed technology Impairment write-offs for 2013: Developed technology Internet domain name Goodwill Total expense for 2013
Solutions Manual, Chapter 4
$
$
100,000 80,000 140,000 550,000 3,400,000
$
180,000
4,090,000 $ 4,270,000
©Cambridge Business Publishers, 2013 31
P4.7
Consolidated Balance Sheet Working Paper, Three Years after Acquisition (see related P3.2) (all amounts in millions)
a.
Calculation of equity in net income for fiscal 2011, 2012, and 2013: GOC’s reported net income (loss) Revaluation writeoffs: Property, plant and equipment $(60)/20 Patents and trademarks $10/5 Long-term debt $(3)/3 Advanced technology $5/5 Customer lists impairment loss Goodwill impairment loss Equity in net income of GOC
2011 $ 15
2012 $ (2)
2013 $ 12 (1)
3 (2) 1 (1)
3 (2) 1 (1) (2) _(3) $ (6)
3 (2) 1 (1) (4) _(2) $ 7
_(2) $ 14
(1) $12 = $900 – 800 – 88 Calculation of Investment balance, June 30, 2013: Investment balance, June 30, 2010 (adjusted to remove earnings contingency) Equity in net income for fiscal 2011 Equity in net income for fiscal 2012 Equity in net income for fiscal 2013 Increase in GOC’s AOCI for fiscal 2011-2013 (= $5 – 3) Investment balance, June 30, 2013
©Cambridge Business Publishers, 2013 32
$ 110 14 (6) 7 __2 $ 127
Advanced Accounting, 2nd Edition
P4.7
continued
b. Consolidation Working Paper, June 30, 2013 Trial Balances Taken From Books Dr. (Cr.)
Eliminations Consolidated
ITI Current assets Property, plant and equipment, net Identifiable intangible assets
$
Investment in GOC Goodwill (1) Current liabilities Long-term liabilities Common stock Additional paid-in capital Retained earnings, July 1 Accumulated other comprehensive income Treasury stock Sales revenue Equity in income of Saxon Cost of goods sold Goodwill impairment loss Other operating expenses $
232 600
GOC $
Dr
12 140
(R) 5 (O-1) 3
1,100
30
(R) 6 (R) 3 (R) 23
127
--
-(175) (1,125) (22) (580) (118)
-(10) (105) (4) (60) 12
(20) 8 (2,000) (7) 1,400 -580
(5) 2 (900) -800 -88
_____ _____ -0- $ -0-
Balances $
249 689
54 (R) 2 (O-2) 1 (O-4) 4 (O-5) 7 (C) 55 (E) 65 (R) 2 (O-6)
(R) 83 (O-3) 1 (E) 4 (E) 60
1,155 -81 (185) (1,230) (22) (580) (118)
1 (R) 12 (E)
(E) 5
(20) 8 (2,900) -2,200 2
2 (E) (C) 7 (O-6) 2 (O-2) 2 (O-4) 1 (O-5) 4 $ 209
(1) Acquisition-date goodwill is calculated as follows: Acquisition cost (adjusted) GOC’s book value Excess of acquisition cost over book value Excess of fair value over book value: Inventory Property, plant and equipment Patents and trademarks Advanced technology Customer lists Long-term debt Goodwill Solutions Manual, Chapter 4
Cr
3 (O-1) 1 (O-3) _______ $ 209
$
____671 -0-
$ 110 (40) 70 $
5 (60) 10 5 25 (3) $
_(18) 88
©Cambridge Business Publishers, 2013 33
P4.7
continued
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 Property, plant and equipment, net Identifiable intangible assets Goodwill Total assets Liabilities and stockholders’ equity Current liabilities Long-term liabilities Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock Total liabilities and stockholders’ equity
©Cambridge Business Publishers, 2013 34
$ 249 689 1,155 __81 $ 2,174 $ 185 1,230 22 580 145 20 __(8) $ 2,174
Advanced Accounting, 2nd Edition
P4.8
Working Paper Eliminating Entries, Partial Year Consolidation (see related P3.3) (all numbers in millions)
a.
Calculation of Equity in net income for 2003: Pharmacia’s reported net income Revaluation writeoffs: Inventory Property, plant and equipment [$(317)/20] x [8.5/12] In-process research and development Developed technology rights $31,596/11 x (8.5/12) Long-term debt Other assets $(15,606)/10 x (8.5/12) Equity in net income of Pharmacia
b.
$
5,000
(2,939) 11 (716) (2,035) 12 1,105 $ 438
Consolidation working paper eliminating entries for 2003: (C) Equity in net income of Pharmacia
438 Investment in Pharmacia
(E) Stockholders’ equity—Pharmacia, 4/16/03
438
7,236 Investment in Pharmacia
(R) Inventory Long-term investments In-process R&D Developed technology rights Goodwill
2,939 40 5,052 37,066 21,304 Property, plant and equipment Long-term debt Other assets Investment in Pharmacia
Solutions Manual, Chapter 4
7,236
317 1,841 15,606 48,637
©Cambridge Business Publishers, 2013 35
P4.8
continued (O) Cost of goods sold Property, plant and equipment Impairment loss Amortization expense Long-term debt Other assets
2,939 11 716 2,035 12 1,105 Inventory Depreciation expense In-process research and development Developed technology rights Interest expense Other operating expenses
P4.9
Goodwill Impairment Testing, IFRS and U.S. GAAP
a.
BP’s 2010 annual report states the following:
2,939 11 716 2,035 12 1,105
The future cash flows are adjusted for risks specific to the cash-generating unit and are discounted using a pre-tax discount rate. The discount rate is derived from the group’s post-tax weighted average cost of capital and is adjusted where applicable to take into account any specific risk relating to the country where the cash-generating unit is located.
Cash flows are adjusted for specific risks and the applicable tax effects before they are discounted, thereby taking into consideration differences in the uncertainty of the business environment. Most likely the cash flows of Exploration and Production segment CGUs are more uncertain than those of Refining and Marketing, although the two segments are closely related. If the cash flows were not adjusted, the discount rate should be adjusted to reflect differences in risk.
©Cambridge Business Publishers, 2013 36
Advanced Accounting, 2nd Edition
P4.9
continued
b.
Exploration and Production CGU UK US Rest of world Total
Value in use $ 9,000 35,000 2,500 $ 46,500
Book value $ 1,114 6,144 2,840 $ 10,098
Impairment loss None None $ 340
Refining and Marketing CGU Rhine FVC Lubricants Other Total
Value in use $ 13,000 6,000 4,000 $ 23,000
Book value Impairment loss $ 1,557 None 1,938 None 4,880 $ 880 $ 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 goodwill allocated to the Rest of World CGU is $630. Therefore, the goodwill impairment loss is $630, and other 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 and Production, and Refining and Marketing. When testing for impairment, BP has the option to perform a qualitative assessment of each reporting unit, using economic, financial, and strategic factors, to determine if it is more likely than not that the unit’s book value exceeds its fair value. If so, the reporting unit’s goodwill is evaluated using a two-step test. Goodwill is tested for impairment only if the estimated fair value of the reporting unit is in fact less than its book value. Because fair value is generally calculated using discounted cash flows, we assume it can be approximated by value-inuse. For both reporting units above, value in use significantly exceeds book value, so no impairment loss is reported, whether BP uses or bypasses the qualitative test. Because reporting units aggregate CGUs, it is likely that CGUs with book value greater than value in use will be offset by those with a value in use that is greater than book value when applying the first step for impairment testing under U.S. GAAP.
Solutions Manual, Chapter 4
©Cambridge Business Publishers, 2013 37
P4.10 Consolidation One and Two Years after Acquisition a.
The investment cost 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 Allocation to identifiable items: Inventories Identifiable intangibles (5-year life) In-process research and development (IPRD) Plant assets (20-year life, straight-line) Goodwill (unallocated balance)
b.
$ 248,000,000 (30,000,000) (40,000,000) (60,000,000) (50,000,000) $ 68,000,000
2007 equity income accrual: Essex’s reported net income Revaluation write-offs: FIFO inventory sold (.4 X $30,000,000) Amortization of identifiable intangibles ($40,000,000/5) Depreciation of plant assets ($50,000,000/20) Goodwill impairment Equity income accrual
$ 140,000,000 (12,000,000) (8,000,000) (2,500,000) (15,000,000) $ 102,500,000
December 31, 2007 working paper eliminations: (C) Equity income accrual
102,500,000 Dividends – Essex (.55 x $140,000,000) Investment in Essex
(E) Stockholders’ equity – Essex, 1/25/07
350,000,000 Investment in Essex
©Cambridge Business Publishers, 2013 38
77,000,000 25,500,000
350,000,000
Advanced Accounting, 2nd Edition
P4.10 continued (R) Inventories Identifiable intangibles In-process research and development Plant assets Goodwill
30,000,000 40,000,000 60,000,000 50,000,000 68,000,000 Investment in Essex
248,000,000
(O) Cost of goods sold Amortization expense Depreciation expense Goodwill impairment loss
12,000,000 8,000,000 2,500,000 15,000,000 Inventories Identifiable intangibles Accumulated depreciation Goodwill
c.
12,000,000 8,000,000 2,500,000 15,000,000
2008 equity income accrual: Essex’s reported net income Revaluation write-offs: Amortization of identifiable intangibles ($40,000,000/5) Depreciation of plant assets ($50,000,000/20) IPRD impairment Equity income accrual
$160,000,000 (8,000,000) (2,500,000) (20,000,000) $129,500,000
December 31, 2008, working paper eliminations: (C) Equity income accrual
129,500,000 Dividends – Essex (.55 x $160,000,000) Investment in Essex
Solutions Manual, Chapter 4
88,000,000 41,500,000
©Cambridge Business Publishers, 2013 39
P4.10 continued (E) Stockholders’ equity – Essex, 1/1/08 (1) (1)
413,000,000
Investment in Essex $350,000,000 + $140,000,000 - $77,000,000
(R) Inventories (.6 x $30,000,000) Identifiable intangibles In-process research and development Plant assets Goodwill
413,000,000
18,000,000 32,000,000 60,000,000 50,000,000 53,000,000 Accum. depreciation Investment in Essex
(O) Amortization expense Depreciation expense IPRD impairment loss
8,000,000 2,500,000 20,000,000 Identifiable intangibles Accumulated depreciation IPRD
©Cambridge Business Publishers, 2013 40
2,500,000 210,500,000
8,000,000 2,500,000 20,000,000
Advanced Accounting, 2nd Edition
P4.11 Intangibles under IFRS a.
Whereas the double-declining balance rate is twice the straight-line rate, 150% declining balance is 1.5 x 10% straight-line rate, or 15%. Following the conventional decliningbalance calculations, we have this amount of amortization expense for 2013, the second year after acquisition: Amortization expense = .15 x [€200 million – (.15 x 200 million)] = €25.5 million
b.
At December 31, 2012, the book value is €36 million after 2012 amortization of €4 million, and the market value of these intangibles is €45 million. December 31, 2012 entries are (all amounts in millions): Amortization expense
4 Intangible assets
4
Intangible assets
9 Revaluation surplus (OCI)
9
December 31, 2013, entries are: Amortization expense
5 Intangible assets
5
€45 million/9 = €5 million Revaluation surplus (OCI) Loss (income)
9 1 Intangible assets
10
At this point the ending book value is €30 million (= €40 – 4 + 9 – 5 – 10], equal to the market value on that date. c.
IFRS impairment loss = book value – greater of (value-in-use, €1,800 million; market value, €1,500 million) = €2,000 – 1,800 = €200 million. U.S. GAAP impairment loss = 0 (sum of undiscounted cash flows €2,500 million > book value, €2,000 million, indicating “no impairment”). The two-step test in U.S GAAP removes some potential impairments from consideration because of the book value: undiscounted cash flows screen. IFRS directly compares fair value (market value or value-in-use, whichever is higher) with book value. Since fair value is lower than the sum of the undiscounted cash flows, IFRS will likely recognize more impairment losses over time than U.S. GAAP.
Solutions Manual, Chapter 4
©Cambridge Business Publishers, 2013 41
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) – Liabilities Liabilities = $35,000 – $26,900 Liabilities = $8,100 b.
Going “by the book,” the question is simply whether useful lives can be reasonably estimated or whether the intangible has an obviously very long indeterminate (indefinite) life. Many cases will be clear-cut and can be justified to the auditors but others will be in gray areas such that the desired reporting result will call forth the case justifying the classification of the intangible one way or another. In these gray areas, management may elect to minimize periodic amortization charges against earnings and take their chances on the somewhat random and very subjective impairment tests. To the extent possible, management would likely classify items and load cost in the indefinite-lived category to minimize the effect on earnings.
c.
With impairment charges being part of income from continuing operations, companies may seek to lower the probability that they will have to recognize goodwill impairment charges. The subjectivity inherent in valuing the reporting units to which the goodwill is assigned—cash flow forecasts and discount rate selections—facilitates decisions to load goodwill onto reporting units that are less-likely impairment candidates, i.e., units with fair value significantly above book 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 Dividends—Caremark Investment in Caremark
(E) Stockholders’ equity—Caremark (1) (1)
1,700
Investment in Caremark $26,900 – $20,800 – ($9,400 – $5,000)
©Cambridge Business Publishers, 2013 42
550 350
1,700
Advanced Accounting, 2nd Edition
P4.12 continued (R) Goodwill Identifiable intangibles, limited life Identifiable intangibles, indefinite life (2)
20,800 2,000 2,400 Investment in Caremark
(2)
25,200
$6,400 – $4,000
(O) Amortization expense
100 Identifiable intangibles, limited life
100
P4.13 Cost Method and Eliminating Entries Three Years after Acquisition Calculation of Investment balance at January 1, 2014: Investment in Sunset Coast, December 31, 2011 Sunset Coast’s reported income, 2012-2013 Sunset Coast’s reported dividends, 2012-2013 (50% of reported income) Revaluation writeoffs, 2012-2013: Plant assets [($1,000,000)/10] x 2 Identifiable intangibles ($3,600,000/20) x 2 Investment in Sunset Coast, January 1, 2014
$ 3,500,000 650,000 (325,000) 200,000 (360,000) $ 3,665,000
Note to instructor: Under LIFO and increasing inventory, the acquisition date revalued inventory is assumed to still be on hand. Consolidation working paper eliminating entries for 2014: (A) Investment in Sunset Coast
3,665,000 Stockholders’ equity— Puffin, 1/1
(C) Dividend income
100,000 Dividends – Sunset Coast (.5 x $200,000)
Solutions Manual, Chapter 4
3,665,000
100,000
©Cambridge Business Publishers, 2013 43
P4.13 Cost Method and Eliminating Entries Three Years after Acquisition (E) Stockholders’ equity—Sunset Coast, 1/1
1,725,000
Investment in Sunset Coast 1,725,000 Sunset Coast’s stockholders’ equity, December 31, 2011 = $1,400,000 (acquisition cost $3,500,000 less excess over book value $2,100,000). Sunset Coast’s stockholders’ equity, January 1, 2014 = $1,400,000 + (1 - .5)(850,000 – 200,000) = $1,725,000. (R) Identifiable intangibles
3,240,000
Inventory 500,000 Plant assets, net 800,000 Investment in Sunset Coast 1,940,000 Revaluations at January 1, 2014 = original revaluations less writeoffs for 2012 and 2013. (O) Plant assets, net Amortization expense
100,000 180,000 Depreciation expense Identifiable intangibles
©Cambridge Business Publishers, 2013 44
100,000 180,000
Advanced Accounting, 2nd Edition