On July 31, 2020, Mexico Company paid $3,000,000 to acquire all of the common stock of Conchita Incorporated, which became a division (a reporting unit) of Mexico. Conchita reported the following 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 stockholders' equity $3,500,000 It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was $2,750,000. Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31, 2020, Conchita reports the following balance sheet information. Current assets $ 450,000 Noncurrent assets (including goodwill recognized in purchase) 2,400,000 Current liabilities (700,000) Long-term liabilities (500,000) Net assets $1,650,000 Finally, it is determined that the fair value of the Conchita Division is $1,850,000. Instructions a. Compute the amount of goodwill recognized, if any, on July 31, 2020. b. Determine the impairment loss, if any, to be recorded on December 31, 2020. c. Assume that fair value of the Conchita Division is $1,600,000 instead of $1,850,000. Determine the impairment loss, if any, to be recorded on December 31, 2020. d. Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

On July 31, 2020, Mexico Company paid $3,000,000 to acquire all of the common stock of Conchita Incorporated, which became a division (a reporting unit) of Mexico. Conchita reported the following 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 stockholders' equity	$3,500,000

It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was $2,750,000. Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31, 2020, Conchita reports the following balance sheet information.

Current assets	$ 450,000
Noncurrent assets (including goodwill recognized in purchase)	2,400,000
Current liabilities	(700,000)
Long-term liabilities	(500,000)
Net assets	$1,650,000

Finally, it is determined that the fair value of the Conchita Division is $1,850,000.

Instructions

a. Compute the amount of goodwill recognized, if any, on July 31, 2020.

b. Determine the impairment loss, if any, to be recorded on December 31, 2020.

c. Assume that fair value of the Conchita Division is $1,600,000 instead of $1,850,000. Determine the impairment loss, if any, to be recorded on December 31, 2020.

d. Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement.

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