On March 31, 2014, Rodeo Company paid $6,000,000 to acquire allof the common stock of Drive Incorporated, which became a divisionof Rodeo. Drive reported the following balance sheet at the time oftheacquisition.
Current assets $2,400,000 Current liabilities $ 500,000
Noncurrent assets 3,200,000 Long-term liabilities 300,000
Total assets $5,600,000 Stockholdersâequity 4,800,000
Total liabilities and equity $5,600,000
It was determined at the date of the purchase that the fairvalue of the identifiable net assets of Drive was $4,500,000. Overthe next 9 months of operations, the newly purchased divisionexperienced operating losses. In addition, it now appears that itwill generate substantial losses for the foreseeable future. AtDecember 31,2014, Drive reports the following balance sheetinformation.
Current assets $1,600,000
Noncurrent assets (including goodwill recognized in purchase) 3,800,000
Currentliabilities (600,000)
Long-termliabilities (400,000)
Netassets $4,400,000
It is determined that the fair value of the Drive Division is$4,500,000. The recorded amount for Driveâs net assets (excludinggoodwill) is the same as fair value, except for property, plant,and equipment, which has a fair value $100,000 above the carryingvalue.
Required
(a) Compute the amount of goodwill recognized, if any, on March31,2014.
(b) Determine the impairment loss, if any, to be recorded onDecember 31, 2014.
(c) Assume that fair value of the Drive Division is $4,000,000instead of $4,500,000.
Determine the impairment loss, ifany, to be recorded on December 31, 2014.
(d) Prepare the journal entry to record the impairment loss, ifany, and indicate where the loss would be
reported in the incomestatement.
On March 31, 2014, Rodeo Company paid $6,000,000 to acquire allof the common stock of Drive Incorporated, which became a divisionof Rodeo. Drive reported the following balance sheet at the time oftheacquisition.
Current assets $2,400,000 Current liabilities $ 500,000
Noncurrent assets 3,200,000 Long-term liabilities 300,000
Total assets $5,600,000 Stockholdersâequity 4,800,000
Total liabilities and equity $5,600,000
It was determined at the date of the purchase that the fairvalue of the identifiable net assets of Drive was $4,500,000. Overthe next 9 months of operations, the newly purchased divisionexperienced operating losses. In addition, it now appears that itwill generate substantial losses for the foreseeable future. AtDecember 31,2014, Drive reports the following balance sheetinformation.
Current assets $1,600,000
Noncurrent assets (including goodwill recognized in purchase) 3,800,000
Currentliabilities (600,000)
Long-termliabilities (400,000)
Netassets $4,400,000
It is determined that the fair value of the Drive Division is$4,500,000. The recorded amount for Driveâs net assets (excludinggoodwill) is the same as fair value, except for property, plant,and equipment, which has a fair value $100,000 above the carryingvalue.
Required
(a) Compute the amount of goodwill recognized, if any, on March31,2014.
(b) Determine the impairment loss, if any, to be recorded onDecember 31, 2014.
(c) Assume that fair value of the Drive Division is $4,000,000instead of $4,500,000.
Determine the impairment loss, ifany, to be recorded on December 31, 2014.
(d) Prepare the journal entry to record the impairment loss, ifany, and indicate where the loss would be
reported in the incomestatement.
