Question

Hello,

I am requesting assistance with the following problem. Required 4 is where I am having the problem. Can you please provide an explanation for the correct answer? Thank you.

At the beginning of 2019, Metatec Inc. acquired Ellison Technology Corporation for $690 million. In addition to cash, receivables, and inventory, the following assets and their fair values were also acquired: Plant and equipment (depreciable assets) Patent Goodwill $ 159 million 49 million 100 million The plant and equipment are depreciated over a 10-year useful life on a straight-line basis. There is no estimated residual value. The patent is estimated to have a 5-year useful life, no residual value, and is amortized using the straight-line method. At the end of 2021, a change in business climate indicated to management that the assets of Ellison might be impaired. The following E amounts have been determined: $ 89 million 69 million Plant and equipment: Undiscounted sum of future cash flows Fair value Patent: Undiscounted sum of future cash flows Fair value Goodwill: Fair value of Ellison Technology Corporation Fair value of Ellison's net assets (excluding goodwill) Book value of Ellison's net assets (including goodwill) $ 21 million 14 million $ 549 million 480 million 560 million* After first recording any impairment losses on plant and equipment and the patent. Required: 1. Compute the book value of the plant and equipment and patent at the end of 2021. 4. Determine the amount of any impairment loss to be recorded, if any, for the three assets.

Answer 1

Ans: 1) Plant & Equipment is having a 10 year useful life with no salvage. Particulars Amount Fair Value as on Jan 1 2019: $159.00 million Less: Depreciation $47.70 =(159/10)*3 years Carrying Value $111.30 million Patent is having a 5 year economic life with no salvage Particulars Amount Fair Value as on Jan 1 2019: $49.00 million Less: Amortization $29.40=(49/5)*3 years Carrying Value $19.60 million Particulars Plant & Equipment Patent Book Value $111.30 million $19.60 million

4) Calculate impairment loss for plant and equipment: Particulars Amount Book value $111.30 million Less: Face value $69.00 million Impairment loss $42.30 million Calculate impairment loss for patent: Particulars Book value Less: Face value Impairment loss Amount $19.60 million $14.00 million $5.60 million Calculate book value of goodwill: Particulars Fair value of M's net assets including goodwill Less: Fair value of M's net assets excluding goodwill Book value of goodwill Amount $549 million $480 million 569 million Particulars Fair value of the recorded goodwill Less: Book value of goodwill Impairment loss Amount 100 million 569 million S31 million

Particulars Plant & Equipment Patent Goodwill Impairment Loss $42.30 million $5.60 million $31 million