P12-5 (Goodwill, Impairment) On July 31, 2014, Mexico Company paid $3,000,000 to acquire all of the common stock of Conchita Incorporated, which became a division of Mexico. Conchita reported the following balance sheet at the time of the acquisition.
Current assets Noncurrent assets
Total assets
$800,000 2,700,000
$3,500,000
Current liabilities Long-term liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
$600,000 500,000
2,400,000
$3,500,000
It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was $2,750,000. Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31, 2014, Conchita reports the following balance sheet information.
Current assets Noncurrent assets (including goodwill recognized in purchase) Current liabilities Long-term liabilities
Net assets
$450,000 2,400,000
(700,000) (500,000)
$1,650,000
It is determined that the fair value of the Conchita Division is $1,850,000. The recorded amount for Conchita’s net assets (excluding goodwill) is the same as fair value, except for property, plant, and equip- ment, which has a fair value $150,000 above the carrying value.
Instructions
(a)Compute the amount of goodwill recognized, if any, on July 31, 2014. (b) Determine the impairment loss, if any, to be recorded on December 31, 2014. (c)Assume that fair value of the Conchita Division is $1,600,000 instead of $1,850,000. Determine the
impairment loss, if any, to be recorded on December 31, 2014. (d)Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be
reported in the income statement
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