Question

Francisco Inc. acquired 100 percent of the voting shares of Beltran Company on January 1, 2017. In exchange, Francisco paid $773,500 in cash and issued 107,000 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	$	127,000		$	99,000		$	99,000
Receivables		270,500			306,000			306,000
Inventory		278,500			306,000			292,400
Patents		644,500			726,000			617,500
Customer relationships		566,500			532,000			493,250
Equipment (net)		390,500			333,000			323,200
Goodwill		?			?			480,000
Accounts payable		(122,500	)		(219,000	)		(219,000	)
Long-term liabilities		(577,500	)		(492,000	)		(492,000	)

1. Prepare Francisco’s journal entry to record the assets acquired and the liabilities assumed in the Beltran merger on January 1, 2017.

2. 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 $1,738,750. What amount of goodwill impairment, if any, should Francisco recognize on its 2018 income statement?

Answer 1

Credit (a) Date General Journal January 1, 2017 Cash Receivables Inventory Patents Customer Relationships Equipment (Net) Goodwill (Note 1) Accounts Payable Long Term Liabilities Cash Common Stock (Company Francisco Par Value) Additional paid-in capital ($11 X 107,000) (To record the acquisition of Beltran Company) Debit 1.27.000 2,70,500 2,78,500 6,44,500 5,66,500 3,90,500 4,80,000 1,22,500 5,77,500 7,73,500 1,07,000 11,77,000 Note: (1) Computation of Goodwill on the acquisition Fair value of net assets and liabilities of Beltran Company ASSETS: Cash Receivables Inventory Patents Customer Relationships Equipment (Net) Total (A) LIABILITIES: Accounts Payable Long Term Liabilities Total (B) Fair value of net assets and liabilities acquired (C) = (A)-(B) 1,27,000 2,70,500 2,78,500 6,44,500 5,66,500 3,90,500 22,77,500 1,22,500 5,77,500 7,00,000 15,77,500

Fair value of consideration transferred Cash Fair value of shares issued ($12 X 107,000) Total 7,73,500 12,84,000 20,57,500 Calculation of Goodwill Fair value of consideration transferred Fair value of net assets and liabilities acquired 20,57,500 -15,77,500 4,80,000 (b) Recognition of goodwill impairemnet loss Book value of assets and liabilities of Beltran Company as on 12/31/18 ASSETS: Cash 99,000 Receivables 3,06,000 Inventory 2,92,400 Patents 6,17,500 Customer Relationships 4,93,250 Equipment (Net) 3,23,200 Goodwill 4,80,000 Total (A) LIABILITIES: Accounts Payable 2,19,000 Long Term Liabilities 4,92,000 Total (B) Book value of assets and liabilities (C) = (A) - (B) 26,11,350 7,11,000 19,00,350

Book value of the entire Beltran reporting unit Fair value of the entire Beltran reporting unit 19,00,350 17,38,750 Since the fair value is less than the book value, therefore impairment loss exist. Fair value of the Beltran reporting unit excluding as on 12/31/18 ASSETS: Cash Receivables Inventory | Patents Customer Relationships Equipment (Net) Total (A) LIABILITIES: Accounts Payable Long Term Liabilities Total (B) Fair value of net assets and liabilities acquired (C) = (A) - (B) 99,000 3,06,000 3,06,000 7,26,000 5,32,000 3,33,000 23,02,000 219000 4,92,000 7,11,000 15,91,000 17,38,750 Fair value of the entire Beltran reporting unit Less: | |Fair value of the Beltran reporting unit excluding as on 12/31/18 Impaired value of Goodwill 15,91,000 1,47,750 4,80,000 Book value of Goodwill Less: Impaired value of Goodwill Impaired loss of Goodwill 1,47,750 3,32,250