At the beginning of 2016, Metatec Inc. acquired Ellison Technology Corporation for $600 million. In addition tocash, receivables, and inventory, the following assets and their fair values were also acquired:Plant and equipment (depreciable assets) $150 millionPatent 40 millionGoodwill 100 millionThe plant and equipment are depreciated over a 10-year useful life on a straight-line basis. There is no estimated residual value. The patent is estimated to have a 5-year useful life, no residual value, and is amortizedusing the straight-line method.At the end of 2018, a change in business climate indicated to management that the assets of Ellison might beimpaired. The following amounts have been determined:Plant and equipment:Undiscounted sum of future cash flows $ 80 millionFair value 60 millionPatent:Undiscounted sum of future cash flows $ 20 millionFair value 13 millionGoodwill:Fair value of Ellison Technology Corporation $450 millionFair value of Ellison’s net assets (excluding goodwill) 390 millionBook value of Ellison’s net assets (including goodwill) 470 million**After first recording any impairment losses on plant and equipment and the patent.Required:1. Compute the book value of the plant and equipment and patent at the end of 2018.2. When should the plant and equipment and the patent be tested for impairment?3. When should goodwill be tested for impairment?4. Determine the amount of any impairment loss to be recorded, if any, for the three assets.
At the beginning of 2016, Metatec Inc. acquired Ellison Technology Corporation for $600 million. In addition to
cash, receivables, and inventory, the following assets and their fair values were also acquired:
Plant and equipment (
Patent 40 million
The plant and equipment are depreciated over a 10-year useful life on a straight-line basis. There is no estimated residual value. The patent is estimated to have a 5-year useful life, no residual value, and is amortized
using the straight-line method.
At the end of 2018, a change in business climate indicated to management that the assets of Ellison might be
impaired. The following amounts have been determined:
Plant and equipment:
Undiscounted sum of future
Fair value 60 million
Patent:
Undiscounted sum of future cash flows $ 20 million
Fair value 13 million
Goodwill:
Fair value of Ellison Technology Corporation $450 million
Fair value of Ellison’s net assets (excluding goodwill) 390 million
Book value of Ellison’s net assets (including goodwill) 470 million*
*After first recording any impairment losses on plant and equipment and the patent.
Required:
1. Compute the book value of the plant and equipment and patent at the end of 2018.
2. When should the plant and equipment and the patent be tested for impairment?
3. When should goodwill be tested for impairment?
4. Determine the amount of any impairment loss to be recorded, if any, for the three assets.
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