Find more at www.downloadslide.com CHAPTER SOLUTIONS TO MULTIPLE CHOICE QUESTIONS, EXERCISES AND PROBLEMS MULTIPLE CHOICE QUESTIONS 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 b Eliminating entry O is as follows: Operating expenses Land, buildings and equipment 2,100,000 400,000 Goodwill Identifiable intangibles 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 $ 2,500,000 400,000 (2,000,000) (500,000) $ 400,000 ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com c Original cost Change in Salem’s retained earnings to 1/1/14 years land, buildings and equipment depreciation 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 c Book value > undiscounted cash flows? Fair value Book value Impairment loss 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 $ 16,000,000 14,000,000 1,200,000 (6,000,000) (2,000,000) 23,200,000 400,000 $23,600,000 Division Yes Division Yes $1,000,000 1,600,000 $ 600,000 $8,000,000 6,400,000 -0- Division $14,000,000 16,000,000 2,000,000 $ 1,600,000 Division $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 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com d Fair value Book value Impairment loss 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 ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com 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 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com d (C) Equity income accrual 114 Dividends – Saber Investment in Saber (E) Stockholders’ Equity – Saber 40 74 2,102 Investment in Saber 2,102 (R) Plant assets, net Goodwill 144 40 Investment in Saber 184 (O) Depreciation expense 16 Plant assets, net e 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 ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com 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 1,000,000 7,200,000 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com 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 $ $ 500,000 200,000 $ 8,000,000 (7,000,000) 1,000,000 (700,000) 300,000 ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com 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 1,900,000 800,000 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com 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 650,000 100,000 ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com 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 Identifiable intangibles (full balance) Long-term debt $[250,000/10] x 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 Find more at www.downloadslide.com 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 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 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 Find more at www.downloadslide.com P4.6 continued 2013 goodwill impairment test: Step 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 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 $ $ 100,000 80,000 140,000 550,000 3,400,000 $ 180,000 4,090,000 $ 4,270,000 ©Cambridge Business Publishers, 2013 31 Find more at www.downloadslide.com 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) (2) (1) (2) (1) (2) _(3) $ (6) _(2) $ 14 2013 $ 12 (1) (2) (1) (4) _(2) $ (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) $ 127 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com 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 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) (O-1) 1,100 30 (R) (R) (R) 23 127 -(175) (1,125) (22) (580) (118) -(10) (105) (4) (60) 12 (20) (2,000) (7) 1,400 -580 (5) (900) -800 -88 _ _ -0- $ -0- (C) 249 689 (R) (O-2) (O-4) (O-5) (C) 55 (E) 65 (R) (O-6) (O-3) (E) (E) 60 (R) 12 (E) (E) 1,155 81 (185) (1,230) (22) (580) (118) (20) (2,900) -2,200 (O-6) (O-2) (O-4) (O-5) $ 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 $ 54 (R) 83 (E) Balances Cr (O-1) (O-3) _ $ 209 671 $ -0- $ 110 (40) 70 $ (60) 10 25 (3) $ _(18) 88 ©Cambridge Business Publishers, 2013 33 Find more at www.downloadslide.com 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 $ 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 Find more at www.downloadslide.com 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 7,236 317 1,841 15,606 48,637 ©Cambridge Business Publishers, 2013 35 Find more at www.downloadslide.com 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 Find more at www.downloadslide.com 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 ©Cambridge Business Publishers, 2013 37 Find more at www.downloadslide.com 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 Find more at www.downloadslide.com 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 88,000,000 41,500,000 ©Cambridge Business Publishers, 2013 39 Find more at www.downloadslide.com 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 Find more at www.downloadslide.com 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 Intangible assets Intangible assets Revaluation surplus (OCI) December 31, 2013, entries are: Amortization expense Intangible assets €45 million/9 = €5 million Revaluation surplus (OCI) Loss (income) Intangible assets 10 At this point the ending book value is €30 million (= €40 – + – – 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 = (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 ©Cambridge Business Publishers, 2013 41 Find more at www.downloadslide.com 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 Find more at www.downloadslide.com 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 Identifiable intangibles ($3,600,000/20) x 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 3,665,000 100,000 ©Cambridge Business Publishers, 2013 43 Find more at www.downloadslide.com 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 ... Saxon for $1,800, but there is a bargain gain that increases the investment balance by $200, as follows: Solutions Manual, Chapter ©Cambridge Business Publishers, 2013 25 Find more at www.downloadslide.com... 10 Investment in S 10 Entry (O) is not needed since no revaluations are written off in 2025 Solutions Manual, Chapter ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com E4.3... acquisition cost over book value Fair value less book value: Equipment Inventory Goodwill Solutions Manual, Chapter $ $ 500,000 200,000 $ 8,000,000 (7,000,000) 1,000,000 (700,000) 300,000 ©Cambridge