On 31st July, 2012, Mexico Company paid $3,000,000 to get all of the common stock of Conchita Inc., which became a division of Mexico. Conchita reported the subsequent balance sheet at the time of the acquisition.
Current Assets $800,000 Current Liabilities: $600,000
Noncurrent Assets $2,700,000 Long Term Liabilities: $500,000
Total Assets: $3,500,000 Stockholders Equity: $2,400,000
Total Liabilities and Equity: $3,500,000
It was evaluated at the date of the purchase that the fair value of the identifiable total assets of Conchita was $2,750,000. Over the next 6 months of operations, the recently purchased division experienced operating losses. In addition, it now seems that it will generate substantial losses for the foreseeable future. At 31st December,2012, Conchita reports the subsequent balance sheet information.
Current Assets: $450,000
Noncurrent Assets: $2,400,000
Current Liabilities: ($700,000)
Long Term Liabilites: ($500,000)
Net Assets: $1,650,000
It is evaluated that the fair value of the Conchita Division is $1,850,000. The recorded amount for Conchita's net assets (excluding goodwill) is the same as the fair value, except for property, equipment, and plant which has a fair value $150,000 above the carrying value.
(a) Evaluate the amount of goowill recognized, if any, on 31st July, 2012.
(b) Evaluate the impairment loss, if any, to be recorded on 31st December, 2012.
(c) Consider that fair value of the Conchita Division is $1,600,000 instead of $1,850,000. Evaluate the impariment loss, if any, to be recorded on 31st December, 2012.
(d) Purpose the journal entry to record the impairment loss, if any, and show where the loss would be reported in the income statement.