Question

On January 1, Prine, Inc., acquired 100 percent of Lydia Company's common stock for a fair value of $123,709,250 in cash and stock. Lydia's assets and liabilities equaled their fair values except for its equipment, which was undervalued by $697,500 and had a 10-year remaining life. Prine specializes in media distribution and viewed its acquisition of Lydia as a strategic move into content ownership and creation. Prine expected both cost and revenue synergies from controlling Lydia's artistic content (a large library of classic movies) and its sports programming specialty video operation. Accordingly, Prine allocated Lydia's assets and liabilities (including $52,240,250 of goodwill) to a newly formed operating segment appropriately designated as a reporting unit. The fair values of the reporting unit's identifiable assets and liabilities through the first year of operations were as follows. Account Cash Receivables (net) Movie library (25-year life) Broadcast licenses (indefinite life) Equipment (10-year life) Current liabilities Long-term debt Fair Values 1/1 12/31 291,000 $ 209,500 584,000 1,050,000 40,700,000 66,080,000 15,230,000 20,180,000 21,380,000 19,290,000 (496,000) (655,000) (6,220,000) (6,605,000) However, Lydia's assets have taken longer than anticipated to produce the expected synergies with Prine's operations. Accordingly, Prine reviewed events and circumstances and concluded that Lydia's fair value was likely less than its carrying amount. At year-end, Prine reduced its assessment of the Lydia reporting unit's fair value to $116,659,500. At December 31, Prine and Lydia submitted the following balances for consolidation. There were no intra- entity payables on that date. Revenues Operating expenses Equity in Lydia earnings Dividends declared Retained earnings, 1/1 Cash Receivables (net) Investment in Lydia Broadcast licenses Movie library Equipment (net) Current liabilities Long-term debt Common stock Prine, Inc. Lydia Co. $ (21,700,000) $ (17,300,000) 19,600,000 13,300,000 (3,930,250) NA 500,000 80,000 (66,000,000) (3,271,500) 395,750 209,500 285,000 1,050,000 127,559,500 NA 505,000 14,210,000 372,500 44,500,000 142,800,000 23,600,000 (787,500) (668,000) (24,600,000) (8,210,000) (175,000,000) (67,500,000)

Answer 1

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you. a. Prine should compare Lydia's total fair value to its carrying value, as follows: 12/31 Carrying value (equity method balance) $ 127,559,500 12/31 Fair value $ 116,659,500 Excess carrying value over fair value $ 10,900,000 Because fair value is less than carrying value, Prine is required to further goodwill is impaired. b. $ 116,659,500 $ $ 12/31 Fair value for Lydia Fair values of assets and liabilities Cash Receivables (net) Movie library Broadcast licenses Equipment Current liabilities Long-term debt Total net fair value Implied fair value for goodwill Carrying value for goodwill Impairment loss $ $ $ $ 209,500 1,050,000 66,080,000 20,180,000 19,290,000 -655,000 -6,605,000 $ $ 99,549,500 $ 17,110,000 $ 52,240,250 $ 35,130,250 Journal Entry by Prine: Goodwill impairment loss Investment in Lydia Co. $ 35,130,250 $ 35,130,250 c. Combined revenues Combined expenses (including excess amortization) Income before impairment loss Goodwill impairment loss-Lydia Net loss $ $ $ $ $ 39,000,000 34,069,750 4,930,250 -35,130,250 -30,200,000 d. Consolidated goodwill Carrying Value Less: Impairment loss $ S 52,240,250 -35,130,250 17,110,000 $ 14,715,000 Consolidated broadcast licenses (Total of both BOOK value) $ Because the subsidiary's book value equaled fair value at acquisition date, no worksheet adjustment is needed

Adjusting Entries Credit Consolidated Totals Accounts Prine, Inc. Lydia Co. Debit Revenues Expenses Equity in Lydia earnings Impairment loss Net income/loss $ -21,700,000 $ -17,300,000 $ 19,600,000 $ 13,300,000 E $ -3,930,250 $ 1 $ 35,130,250 $ $ 29,100,000 $ -4,000,000 $ 69,750 $ 3,930,250 $ -39,000,000 $ 32,969,750 $ $ 35,130,250 $ 29,100,000 $ $ 3,271,500 D $ Retained Earnings 1/1 Dividends paid Net income Retained earnings 12/31 $ $ $ -66,000,000 $ -3,271,500 S 500,000 $ 80,000 29,100,000 $4,000,000 -36,400,000 $ -7,191,500 $ 80,000 $ $ $ -66,000,000 500,000 29,100,000 - 36,400,000 Cash Receivables (net) Investment in Lydia, Co. $ $ $ 395,750 $ 285,000 $ 92,429,250 $ 209,500 1,050,000 D $ 80,000 S A 1 $ 605,250 $ 1,335,000 $ 70,771,500 $ $ 17,807,500 $ 3,930,250 $ 14,715,000 $ 44,872,500 $ 69,750 $ 167,027,750 $ 17,110,000 $ 245,665,500 Broadcast licenses Movie library Equipment (net) Goodwill Total assets $ 505,000 $ 14,210,000 $ 372,500 $ 44,500,000 $ 142,800,000 $ 23,600,000 A $ $ A $ 236,787,500 $ 83,569,500 $ 697,500 E $ 17,110,000 Current Liabilities Long-term Debt Common stock Retained earnings 12/31 Total liabilities and equity $ 67,500,000 $ -787,500 $ -668,000 $ -24,600,000 $ -8,210,000 $ 175,000,000 $ -67,500,000 S $ -36,400,000 $ -7,191,500 $ -236,787,500 $ -83,569,500 $ $ $ -1,455,500 $ -32,810,000 $ -175,000,000 $ -36,400,000 $ 245,665,500 $