Chapter 12, Problem 12.5P

Goodwill Impairment, Tangible Fixed Assets, and Finite-Life Intangible Assets’ Impairments. Green River Company acquired 100% of the voting stock of the AutoStyle Group on January 1 of the current year for a total acquisition cost of $250,000. The trial balance of AutoStyle on the date of acquisition follows.

Description	Debit	Credit
Investment securities – held to maturity	$ 30,000
Plant and equipment – net	195,000
Intangible assets – net	70,000
Long-term debt		$ 115,000
Contributed capital		60,000
Retained earnings		120,000
Totals	$295,000	$295,000

The AutoStyle Group acquired the intangible assets 3 years ago. It amortizes the assets using the straight-line method with no estimated residual value. The appraisal of the subsidiary’s net assets on the date of acquisition indicated that the following adjustments were Required:

Description	Book Value	Fair Value	Adjustment
Plant and equipment – net	$195,000	$210,000	$15,000
Customer list	0	50,000	50,000
Long-term debt	(115,000)	(120,000)	(5,000)
Total net assets	$ 80,000	$140,000	$60,000

On December 31 (1 year after the acquisition), Green River’s management conducted its annual impairment test for goodwill. Management has also assessed recent events and determined that it should review its plant and equipment and finite-life intangible assets for possible impairment. Management determines AutoStyle to be the reporting unit, which is also the cash-generating unit. Management estimated that the fair value of the unit (AutoStyfe) with goodwill 1 year after the acquisition was $300,000; its value in use was $310,000; and the costs to sell were $20,000. The net assets of the unit excluding goodwill, were appraised at $294,000. Assume that annual depreciation is $5,000 annual amortization for the customer list is $1,000, and the annual amortization for the other intangible assets is $3,500. Green River uses separate accounts for accumulated depreciation and accumulated amortization. Treat the customer list as a finite-life intangible asset.

Management is unable to determine fair values for the reporting unit s assets, but it estimates the following future cash flows for each of the unit's assets with the exception of goodwill. Assume that Green River’s cost of capital is 5%.

Future Period	Plant and Equipment	Finite-Life Intangible Assets	Customer List
Year 1	$ 51,500	$11,000	$16,800
Year 2	40,000	10,000	14,200
Year 3	20,500	8,900	10,600
Year 4	14,000	7,700	9,500
Year 5	0	6,500	8,800
Year 6	0	6,000	5,100
Year 7	0	3,900	3,000
Total	$126,000	$54,000	$68,000

Required

1. a. Compute the amount of goodwill to be recorded on the date of acquisition.
2. b. Conduct the impairment test for goodwill at the end of the year, 1 year after the acquisition Assume no changes in the reporting unit's assets and liabilities except for depreciation and amortization.
3. c. Conduct the impairment tests indicated for assets other than goodwill at the end of the year, 1 year after the acquisition.
4. d. Prepare the journal entries Required to record any impairment losses computed in parts (b) and (c).