Hello sunyeshen Learning Exercise 7: Impairment of PP&E; Intangible Assets; & Goodwill (25 points) (Solutions) Problem I Bateman Company purchased a convenience store building on January I, 2007, for a The building has been depreciated using the straight-line method With a 20-year useful life and residual value. As of January 1, 2013, Bateman has converted the building into an Internet Learning center where classes on Internet usage will be conducted six days a week. Because of the change the use of the building, Bateman is evaluating the building for possible impairment.
Bateman estimates that the building has a remaining useful life of 10 years, that Its residual value will be zero, that net cash inflow from the building will be $400,000 per year. and that the current fair value ot the building is Reqwred. a. How much impairment loss should be recorded? b. Record depreciation expense for 2013. Problem 2 The Pentella Company acquired Susan Company on January 1, As part of the acquisition, SIO. OOO in goodwill was recognized: this goodwill was assigned to Pentella Production reporting unit. During the year. he Production reporting unit reported revenues of $13,000.
Publicly traded companies with operations similar to those of the Production unit had price-to-revenue ratios averaging 1 ,60_ The fair values and book values Of the assets and liabilities Of the production reporting unit are as follcr. vs: Required. a. What IS the amount Of the impairment loss, if any? b. Record the journal entry ‘f there iS any impairment loss. Problem 3 Bellcnus Bottling purchased for $800,000 a trademark for a very successful soft drink it markets under the name BLAST!
The trademark was determined to have an indefinite Ilfe. A competitor recently introduced a product that is in direct cornpetit. n with the BLAST! product, thus suggesting the need for impairment test. Data gathered by Bellows suggests that the useful life of the trademark is still indefinite. but the cash flows expected to be generated by the trademark have been (with 20% probability). The appropriate risk-free interest rate is 5%. Prepare the appropriate Journal entry (if needed) to record the effect of the events described above. To determine if an intangible asset that has an indefinite life compare the carrying value of the asset to its fair value – a one-step approach.
If the fair value is less than the intangible asset then the asset is impaired by the difference between the fair value and the assets carrying value (book value). The estimate of the fair value of the intangible is computed as follows: Present Value of Indefinite Annual cash Flows $ 600,000 $1 Scenario 1 Scenario 2 Total estimated fair value Future cash Inflows $30,000 $60,000 probability robabilitywetghted present value $480,000 240,000 $720,000 The present value of a stream of indefinite or infinite, annual cash flows is a perpetuity calculated by dividing the annual cash flow by the discount rate (annual cash flow/discount rate).
Since the estimated fair value of the trademark is less than its book value ($720,000 ; $800,000), the intangible asset is impaired. The impairment loss is recognized with the following Journal entry: Impairment Loss ($800,000 – $720,000) Trademark 80,000 80,000 5 Problem 4 Wilbur Company acquired Smith Company on January 1, 2013. As part of the acquisition, $1,000,000 in goodwill was recognized and assigned to Wilbur’s Transportation reporting unit. For 2013, earnings from the Transportation reporting unit were $450,000.
Separately traded companies with operations similar to the Transportation reporting unit had market values approximately equal to five times earnings. As of December 31 , 2013, book values and fair values of the Transportation reporting unit were: 800k values $1 Fatr values Intangible Assets Goodwill Liabilities Prepare the impairment test of goodwill as well as any entry needed to record an mpairment loss. Solutions: Step 1: Compare Estimated Fair Value of Reporting Unit (EFVRU) to its Book Value (BV).
If the Estimated Fair Value is less then impairment exists. Using the earnings multiple, the fair value of the Transportation reporting unit is estimated to be $2,250,000 ($450,000 x 5). The book value of the net assets of the Transportation reporting unit is: + – = EPVRU = BV EPVRU < BV then impairment exist. = Z500,ooo estimated fair value of the reporting unit and the fair value of the individual (identifiable) net assets. If implied goodwill is less than the reported goodwill then the difference is the impaired amount.
The implied fair value of goodwill is computed as follows: Estimated fair value of Transportation reporting unit $2,250,000 Fair value of identifiable net assets ($4,500,000 – $2,500,000) 2,000,000 Implied fair value of goodwill $ 250,000 The implied fair value of goodwill is less than the recorded amount of goodwill ($250,000 < $1 The Journal entry to record the goodwill impairment loss is: Goodwill Impairment Loss Goodwill – $250,000)