Goodwill, impairment.
On May 31, 2004, Porter Company paid $2,100,000 to acquire all of the common stock of Dryer Corporation, which became a division of Porter. Dryer reported the following balance sheet at the time of the acquisition:
Current assets $500,000 Current liabilities $400,000
Noncurrent assets 1,800,000 Long-term liabilities 300,000
Stockholders’ equity 1,600,000
Total liabilities and
Total assets $2,300,000 stockholders’ equity $2,300,000
It was determined at the date of the purchase that the fair value of the identifiable net assets of Dryer was $1,800,000. At December 31, 2004, Dryer reports the following balance sheet information:
Current assets $400,000
Noncurrent assets (including goodwill recognized in purchase) 1,600,000
Current liabilities (500,000)
Long-term liabilities (300,000)
Net assets $1,200,000
It is determined that the fair market value of the Dryer division is $1,250,000. The recorded amount for Dryer’s net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value of $150,000 above the carrying value.
Instructions: Show your calculations and
(a) Compute the amount of goodwill recognized, if any, on May 31, 2004.
(b) Determine the impairment loss, if any, to be recorded on December 31, 2004.
(c) Assume that the fair value of the Dryer division is $1,100,000 instead of $1,250,000. Prepare the journal entry to record the impairment loss, if any, on December 31, 2004.
Bond discount amortization.
On June 1, 2004, Janson Bottle Company sold $1,000,000 in long-term bonds. The bonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under the effective interest method.
Instructions:
(a) Determine the selling price of the bonds.
(b) Prepare a bond amortization table for this problem to indicate the amount of interest expense and discount amortization at each May 31 (use Excel). Make sure all columns and rows are properly labeled. (Round to the nearest dollar.)
(c) Assuming that interest and discount amortization are recorded each May 31, prepare the adjusting entry to be made on December 31, 2006. (Round to the nearest dollar.)
Bad debt Expense Issues:
Rudolph Company is a rapidly growing subsidiary of Hundley Corporation. Rudolph Company’s controller believes that the company’s annual allowance for doubtful accounts should be 2% of net credit sales. The president of Rudolph Company, however, is concerned that the parent company (Hundley Corp.) might expect the subsidiary (Rudolph Company) to sustain its 10% growth rate and suggests that he controller increase the allowance for doubtful accounts to 3% annually. The president thinks that the lower net income resulting from bad debt expense calculated at 3% of credit sales , (which reflects a 6% growth rate-compared to 10% growth rate when bad debt expense is calculated as 2% of credit sales) will be more sustainable for Rudolph Company.
A. Should the controller be concerned with the company’s growth rate in estimating the bad Debt expense? Explain your response.
B. Does the president’s request present an ethical dilemma for the controller? Explain your response.
C. Rudolph Company’s sales for the year 2002 were $10,000,000 of which 90% were on account. The allowance for bad debts account had a credit balance of $300,000 at December 31, 2001. Using the percentage of sales method prepare the journal entry to record the bad debt expense using the controller’s estimate of 2% of net credit sales as the estimated expense.