stribution 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 $54,601,750 of goodwill) to a newly formed operating segment appropriately designated as a reporting uni
On January 1, Prine, Inc., acquired 100 percent of Lydia Company’s common stock for a fair value of $126,155,750 in cash and stock. Lydia’s assets and liabilities equaled their fair values except for its equipment, which was undervalued by $682,500 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 $54,601,750 of
The fair values of the reporting unit’s identifiable assets and liabilities through the first year of operations were as follows.
| Fair Values | ||||||
| Account | 1/1 | 12/31 | ||||
| Cash | $ | 261,000 | $ | 272,500 | ||
| Receivables (net) | 537,000 | 1,045,000 | ||||
| Movie library (25-year remaining life) | 41,050,000 | 64,090,000 | ||||
| Broadcast licenses (indefinite remaining life) | 15,870,000 | 22,630,000 | ||||
| Equipment (10-year remaining life) | 21,160,000 | 19,590,000 | ||||
| Current liabilities | (494,000 | ) | (805,000 | ) | ||
| Long-term debt | (6,830,000 | ) | (6,585,000 | ) | ||
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 $117,707,500.
At December 31, Prine and Lydia submitted the following balances for consolidation. There were no intra-entity payables on that date.
| Prine, Inc. | Lydia Co. | |||||
| Revenues | $ | (26,600,000 | ) | $ | (13,900,000 | ) |
| Operating expenses | 18,800,000 | 12,000,000 | ||||
| Equity in Lydia earnings | (1,831,750 | ) | ||||
| Dividends declared | 200,000 | 80,000 | ||||
| (58,300,000 | ) | (3,371,500 | ) | |||
| Cash | 751,750 | 272,500 | ||||
| Receivables (net) | 307,500 | 1,045,000 | ||||
| Investment in Lydia | 127,907,500 | |||||
| Broadcast licenses | 557,500 | 14,510,000 | ||||
| Movie library | 592,500 | 40,300,000 | ||||
| Equipment (net) | 142,800,000 | 25,300,000 | ||||
| Current liabilities | (985,000 | ) | (846,000 | ) | ||
| Long-term debt | (29,200,000 | ) | (7,890,000 | ) | ||
| Common stock | (175,000,000 | ) | (67,500,000 | ) | ||
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Prepare a consolidated worksheet for Prine and Lydia (Prine’s
trial balance should first be adjusted for any appropriate impairment loss).
Consolidated Worksheet - partially completed. Please advise on consolidated goodwill, net income/loss, and Prine's invesmtent in Lydia.
| Accounts | Prine, Inc. | Lydia Co. | Debit | Credit | Consolidated Totals |
| Revenues | $26,600,000 | $13,900,000 | |||
| Expenses | 18,800,000 | 12,000,000 | 68,250 | 30,868,250 | |
| Equity in Lydia earnings | 1,831,750 | ||||
| Impairment loss | 37,131,750 | 0 | 37,131,750 | ||
| Net income/loss | $68,000,000 | ||||
| Retained earnings 1/1 | $58,300,000 | $3,371,500 | 3,371,500 | ||
| Dividends declared | 200,000 | 80,000 | 80,000 | 200,000 | |
| Net income | 68,000,000 | ||||
| Retained earnings 12/31 | $68,200,000 | ||||
| Cash | $751,750 | $272,500 | $1,024,250 | ||
| Receivables (net) | 307,500 | 1,045,000 | 1,352,500 | ||
| Investment in Lydia, Co. | |||||
| Broadcast licenses | 557,500t | 14,510,000 | 15,067,500 | ||
| Movie library | 592,500 | 40,300,000 | 40,892,500 | ||
| Equipment (net) | 142,800,000 | 25,300,000 | 682,500 | 68,250 | |
| Goodwill | |||||
| Total assets | $58,336,750 | ||||
| Current liabilities | $985,000 | $846,000 | |||
| Long-term debt | 29,200,000 | 7,890,000 | |||
| Common stock | 175,000,000 | 67,500,000 | 67,500,000 | ||
| Retained earnings 12/31 | 68,200,000 | ||||
| Total liabilities and equity | $205,185,000 | $76,236,000 | $71,622,250 | $148,250 | $68,200,000 |
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