Problem - On July 31, 2012, Mexico Company paid $3,000,000 to acquire all of the common stock of Conchita Inc., which became a division of Mexico. Conchita reported the following balance sheet at the time of the acquisition.
Current Assets $800,000 Current Liabilities: $600,000
Noncurrent Assets $2,700,000 Long Term Liabilities: $500,000
Total Assets: $3,500,000 Stockholders Equity: $2,400,000
Total Liabilities and Equity: $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, 2012, Conchita reports the following balance sheet information.
Current Assets: $450,000
Noncurrent Assets: $2,400,000
Current Liabilities: ($700,000)
Long Term Liabilites: ($500,000)
Net Assets: $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 the fair value, except for property, plant, and equipment, which has a fair value $150,000 above the carrying value.
(a) Compute the amount of goowill recognized, if any, on July 31, 2012.
(b) Determine the impairment loss, if any, to be recorded on December 31, 2012.
(c) Assume that fair value of the Conchita Division is $1,600,000 instead of $1,850,000. Determine the impariment loss, if any, to be recorded on December 31, 2012.
(d) Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement.