Question

Francisco Inc. acquired 100 percent of the voting shares of Beltran Company on January 1, 2017. In exchange, Francisco paid $788,250 in cash and issued 125,000 shares of its own $1 par value common stock. On this date, Francisco’s stock had a fair value of $12 per share. The combination is a statutory merger with Beltran subsequently dissolved as a legal corporation. Beltran’s assets and liabilities are assigned to a new reporting unit. The following reports the fair values for the Beltran reporting unit for January 1, 2017, and December 31, 2018, along with their respective book values on December 31, 2018. Beltran Reporting Unit Fair Values 1/1/17 Fair Values 12/31/18 Book Values 12/31/18 Cash $ 125,500 $ 79,500 $ 79,500 Receivables 308,750 348,000 348,000 Inventory 264,250 310,000 302,900 Patents 623,500 740,000 593,500 Customer relationships 674,750 636,000 595,750 Equipment (net) 394,500 290,000 282,550 Goodwill ? ? 580,000 Accounts payable (172,500 ) (260,000 ) (260,000 ) Long-term liabilities (510,500 ) (412,000 ) (412,000 ) Prepare Francisco’s journal entry to record the assets acquired and the liabilities assumed in the Beltran merger on January 1, 2017. On December 31, 2018, Francisco opts to forgo any goodwill impairment qualitative assessment and estimates that the total fair value of the entire Beltran reporting unit is $1,851,500. What amount of goodwill impairment, if any, should Francisco recognize on its 2018 income statement?

Answer 1

First we have to record the journal entries regarding to the acquisition.

• 125,000 shares * $1 par value common stock = $125,000.
• 125,000 shares * $12 fair value per share= 1500000

From which 1,375,000 refer to paid in capital excess of par value

So, the bank will have a debit of 1500000 (125,000+1,375,000)

As he also paid some shares in cash, we give a debit to cash and a credit to ordinary share capital, this means that despites he paid with cash, that cash is still his in form of shares.

Journal entries 1/1/2017
Account	Debit	Credit
Bank	$ 1,500,000.00
common Stock		$     125,000.00
Paid-in Capital in excess of par value		$ 1,375,000.00
Cash	$     788,250.00
ordinary share capital		$     788,250.00
Total	$ 2,288,250.00	$ 2,288,250.00

Now, let´s organize the information given...

JOURNAL ENTRIES TO RECORD THE ASSETS ACQUIREDAND THE LIABILITIES ASSUMED

Beltran Reporting Unit		Fair Values 1/1/17		Fair Values 12/31/18		Book Values 12/31/18
Cash		125,500		79,500		79,500
Receivables		308,750		348,000		348,000
Inventory		264,250		310,000		302,900
Patents		623,500		740,000		593,500
Customer relationships		674,750		636,000		595,750
Equipment (net)		394,500		290,000		282,550
Goodwill		-		-		580,000
Accounts payable		-172,500		-260,000		-260,000
Long-term liabilities		-510,500		-412,000		-412,000
Totals		1,708,250		1,731,500		2,110,200

Now let´s get the amount of Godwill impairment. Since francisco estimates that the total fair value of the reporting unit for December 31, 2018 is 1,851,500. an easy way to get the impairment is by substracting this amount (1851,500) from the total for December 31, 2018. that will give us an idea of how much we need to deduct from 2018 totals so that the estimation matches with it.

2,110,200- 1,851,500=258,700 this is the amount of goodwill to be deducted. the journal to record this event is as follows

DECEMBER 31, 2018
Account	Debit	Credit
Loss on Goodwill impairment	258700
Goodwill		258700

On the income statement for 2018, the LOSS ON GOODWILL IMPAIRMENT will be recognized as an expense, directly affecting the profits of that year.

Hope this helps you!