Question

At the beginning of 2019, Metatec Inc. acquired Ellison Technology Corporation for $650 million. In addition to cash, receivables, and inventory, the following assets and their fair values were also acquired: Plant and equipment (depreciable assets) $155 million 45 million Patent Goodwill 120 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 amounts have been determined: Plant and equipment: Undiscounted sum of future cash flows $ 85 million Fair value 65 million Patent: $ 20 million Undiscounted sum of future cash flows Fair value 14 million 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) $505 million 440 million 520 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

ANSWER

155 15.50 1) Calculation of Book Value Plant and Equipment Fair Value acquired beginning of 2019 Life (in years) Depreciation per year (155/ 10) Accumulated Depreciation 2019 2020 2021 Book Value of Plant and Equipment at the end of year 2021 Fair Value acquired beginning of 2019 Less: Accumulated Depreciation Book value of plant and equipment 15.50 15.50 15.50 46.50 155 (46.50) 108.50 $ Patent Fair Value acquired beginning of 2019 Life (in years) Depreciation per year (45/5) Accumulated Depreciation 2019 2020 2021 Book Value of Patent at the end of year 2021 Fair Value acquired beginning of 2019 Less: Accumulated Depreciation Book value of patent 18

4) Calculation of Impairment Loss if Any plant and Equipment Book value of plant and Equipment at the end of 2021 Undiscounted sum of future cash flows $ 108.50 Future cash flow was less than the book value of Plant and Equipment. Therefore, impairment is exist. $ Calculation of impairment Loss Book value of Plant and Equipment at the end of 2021 Less: Fair value of Plant and Equipment at the end of 2021 impairment loss 108.50 (65) 43.50 $ Patent Book Value of Patent at the end of year 2021 Undiscounted sum of future cash flows Future cash flow was more than the book value of patent. Therefore no impairment is exist

Goodwil Book value of Ellison's net assets (including goodwill) Fair value of Ellison's Technology Corporation 520 505 Fair Value of Ellison's business was less than its book value. Therefore it means imapairment exist Fair value of Ellison's Technology Corporation Less: Fair value of Ellison's (excluding goodwill) Impaired Value of Goodwill 505 (440) 65 Fair value of Goodwill acquired at the beginning of 2019 Less: Impaired Value of Goodwill impairment Loss 120 (65) 55 impairment Loss $ 43.50 Assets Plant and Equipment Patent Goodwill 55

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