Question 1 - Estimating Goodwill Impairment
On January 1 of the current year, Engel Company purchases 100% of Ball Company for $8.4 million. At the time of acquisition, the fair value of Ball's tangible net assets (excluding goodwill) is $8.1 million. Engle ascribes the excess of $300,000 to goodwill. Assume that the fair value of Ball declines to $6.25 million and that the fair value of Ball's tangible net assets is estimated at $6.15 million as of December 31.
a. Determine if the goodwill has become impaired and, if so, the amount of the impairment.
b. What impact does the impairment of goodwill have on Engel's financial statements?
Question 2 - Analyzing Equity Changes from Convertible Preferred Stock
Xerox Corp reports the following stockholders' equity information in its 10-K report
|
Shareholders Equity
|
December, 31
|
|
(In millions, except share data in thousands)
|
2012
|
2011
|
|
Series A convertible preferred stock
|
$349
|
$349
|
|
Common stock, $1 par value
|
1,239
|
1,353
|
|
Additoinal paid-in capital
|
5,622
|
6,317
|
|
Treasury stock, at cost
|
(104)
|
(124)
|
|
Retained earnings
|
7,991
|
7,046
|
|
Accumulated other comprehensive loss
|
(3,227)
|
(2,716)
|
|
Xerox shareholders' equity
|
$11,521
|
$11,876
|
|
(In millions, except share data in thousands)
|
Common
Stock
|
Additional Paid-inCapital
|
Treasury Stock
|
Retained Earnings
|
Accumulated Other Comprehensive Loss
|
Xerox Shareholders' Equity
|
Non-controlling interests
|
Total Equity
|
|
Balance at December 31, 2011
|
$1,353
|
$6,317
|
$ (124)
|
$7,046
|
$ (2,716)
|
$11,876
|
$149
|
$12,025
|
|
Comprehensive income
|
-
|
-
|
-
|
1,195
|
(511)
|
684
|
28
|
712
|
|
Cash dividends declared - common stock
|
-
|
-
|
-
|
(226)
|
-
|
(226)
|
-
|
(226)
|
|
Cash dividends declared - preferred stock
|
-
|
-
|
-
|
(24)
|
-
|
(24)
|
-
|
(24)
|
|
Contribution of common stock to U.S. pension plan
|
15
|
115
|
-
|
-
|
-
|
130
|
-
|
130
|
|
Stock option and incentive plans, net
|
18
|
115
|
-
|
-
|
-
|
133
|
-
|
133
|
|
Payments to acquire treasury stock, including fees
|
-
|
-
|
(1,052)
|
-
|
-
|
(1,052)
|
-
|
(1,052)
|
|
Cancellation of treasury stock
|
(147)
|
(925)
|
1,072
|
-
|
-
|
-
|
-
|
-
|
|
Distributions of noncontrolling interests
|
-
|
-
|
|
-
|
-
|
-
|
(34)
|
(34)
|
|
Balance, December 31 2012
|
$1,239
|
$5,622
|
$ (104)
|
$7,991
|
$ (3,227)
|
$11,521
|
$143
|
$11,664
|
Preferred Stock: as of December 31, 2012 we had one class of preferred stock outstanding We are authorized to issue approximately 22 million shares of cumulative preferred stock, $1.00 par value per share
Series A Convertible Preferred Stock: in 2010, in connection with our acquisition of ACS, we issued 300,000 shares of Series A convertible prepetual stock with an aggregate liquidation preference of $300 and an initial fair value of $349. The convertible preferred stock pays quarterly cash dividends at a rate or 8% per yaer ($24 per year). Each share of convertible preferred stock is convertible at any time, at the option of the holder, into 89.8876 shares of common stock for a total of 26,966 thousand shares (reflecting an initial conversion price of approximately $11.125 per share of common stock), subject to customary anti-dilution adjustments
Common Stock: We have 1.75 billion authorized shares of common stock, $1.00 par value per share. At December 31, 2012, 155 million shares were reserved for issuance under our incentive compensation plans, 48 million shres were reserved for debt to equity exchanges, 27 million shares were reserved for conversion of the Series A convertible preferred stock and 2 million shares were reserved for the conversion of convertible debt.
Required
a. At December 31, 2012 Xerox reports $349 million of 8% Series A Convertible Preferred stock. What is the dollar amount of dividends that Xerox must pay on this stock (assume a par value or $100 per share)
b. Describe the effects that will occur to Xerox's balance sheet and its income statement when the Series A Convertible Preferred stock is converted.
c. What is the benefit, if any, of issuing equity shares with a conversion features? How are these securities treated in the computation of earnings per share (EPS)?