Question

Question 3 (13 marks)

Popeye Inc. acquired 400,000 of the 500,000 outstanding common shares of Sailor Limited on July 1, 2013, by issuing 510,000 of its own common shares with an estimated market value of $10 per share and paying cash of $100,000.

On July 1, 2013, Sailor Limited’s financial statements included common shares of $3,000,000 and retained earnings of $2,050,000. All the company’s assets and liabilities were fairly valued except for the following:

                                                                                             Carrying value                                     Fair value

                                Inventories                                            $1,500,000                                       $1,750,000

                                Machinery (at cost)                              6,000,000                                       5,500,000

                                    Accumulated amortization          (1,000,000)

Customer list                                                      --                                                 520,000

                                Long-term debt                                     1,300,000                                       1,600,000

The inventories were sold by the end of 2013. The fixed assets and customer list had a remaining useful life of five years and ten years respectively on the acquisition date. The long-term debt matures on June 30, 2019. Any goodwill arising from the acquisition was tested for impairment each year. Impairment of $120,000 was determined to have occurred in 2015 and a further impairment of $140,000 in 2016.

Popeye accounts for its investment in Sailor using the equity method and values the non-controlling interest in the subsidiary at fair value, proportionate to the price paid for the controlling interest.

a. Calculate the amount of goodwill that will appear in the consolidated financial statements prepared immediately after the acquisition by Popeye Inc. of its interest in Sailor Limited.

b. Prepare an amortization and impairment schedule for the acquisition differential arising from this business combination. Your schedule should cover the period from the acquisition date to the end of 2016.

Answer 1

SlO0000 Calculation of goodwill Goodwill. Consideration paid + Fair value of non conhelling interest & Fair value of equity previous interest - Fale value of net alset recognised Consuderation paid 510000 shares @ $10 each $5100000 Cash $5200000 Fair value of NC - Proportionate to the price paid - $5200000 x 20% + 90.000otto 80% 500000-80% - $1300000_ AICI= 20% Fair value of net asset Snuentolies $1750000 Machinery $ 5500000 Customer dist $ 520000 o long term debt ($ 1600000) Fair value of net asset $6170.000 T Note Goodwil at the date of acquwibon $5200000 + $ 1300000 - $6170000 e $330000

(B] Amortisation and impulsement schedules Impairment of goodwill Date Opening - Simpaisement Closing balance Balance Dec 2017 330000 2014 330000 330000 2015 330000 1 90000 210000 2016 210.000 140000 $70,000 Amatisation of customel list Date Op. balance Amortisation Cl. balance Dec 2018 9014 2015 2016 520000 468000 416000 364000 52000 52000 52000 52000 468000 416000 36 4000 312000