Question

Exercise 12-14 Presented below is net asset information related to the Tamarisk Division of Santana, Inc. TAMARISK DIVISION NET ASSETS AS OF DECEMBER 31, 2017 (IN MILLIONS) $59 208 Cash Accounts receivable Property, plant, and equipment (net)2,603 Goodwill Less: Notes payable Net assets 209 (2.598) $481 The purpose of the Tamarisk Division is to develop a nuclear-powered aircraft. If successful, traveling delays associated with refueling could be substantially reduced. Many other benefits would also occur. To date, management has not had much success and is deciding whether a write-down at this time is appropriate. Management estimated its future net cash flows from the project to be $445 million. Management has also received an offer to purchase the division for $335 million. All identifiable assets' and liabilities book and fair value amounts are the same. Prepare the journal entry to record the impairment at December 31, 2017. (If no entry is required, select "No Entry for the account titles and enter O for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) aNo Entry for the Account Titles and Explanation Debit Credit

Answer 1

Marin Division

Impairment loss = carrying value of the division – fair value of the division

When carrying value exceeds fair value of assets, we record the difference as impairment loss.

Calculation of Effective goodwill:

Market value of the division               =$335,000,000

Carrying value of the division

(Excluding the value of goodwill)      =$272,000,000

Effective value of goodwill                =$63,000,000

Value of goodwill in the books

(Carrying value)                                  =$209,000,000

Loss on impairment                             =$146,000,000

Journal entry—

Date                Account Title and Explanation                       Debit               Credit

Dec 31, 2017               Loss on Impairment                            $146,000,000

Goodwill                                                         $146,000,000

(To record loss on impairment of goodwill)

b. When fair value increased to $349,000,000.

No journal entry is needed to record the increase in fair value of the Marin division. The SFAS No. 142, and IAS 36 do not permit subsequent reversal of a previously recognized impairment loss. The impairment loss is reported in the income statement while the new adjusted value of the goodwill becomes the value to be reported in the financial statements.