Chapter 3, Problem 38P

a.

To determine

Find the relevant initial test to determine whether goodwill could be impaired or not.

Explanation of Solution

The relevant initial test to determine whether goodwill could be impaired or not:

Particulars	Amount
Carrying value	$ 120,070,000
Fair value	$ 110,000,000
Excess of carrying value over fair value	$   10,070,000

Table: (1)

The initial test implies that the goodwill should be tested for impairment as the fair value is less than that of carrying value.

b.

To determine

Find the amount at which Company P record an impairment loss for its Company L reporting unit for the year.

Explanation of Solution

Computation of amount at which Company P record an impairment loss for its Company L reporting unit for the year:

Particulars		Amount
Fair value of Company L		$  110,000,000
Fair value of net assets and liabilities:
Cash	$           109,000
Receivables	$           897,000
Movie library	$      60,000,000
Broadcast licenses	$      20,000,000
Equipment	$      19,000,000
Current liabilities	$         (650,000)
Long-term debt	$      (6,250,000)
Total fair value		$    93,106,000
Implied fair value of goodwill		$    16,894,000
Carrying value of goodwill		$    50,000,000
Impairment loss		$    33,106,000

Table: (2)

The following journal entry can be recorded for recording goodwill impairment loss:

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Goodwill impairment loss		$ 33,106,000
	Investment in Company L			$ 33,106,000
	(being goodwill impairment loss recorded)

Table: (3)

c.

To determine

Find the amount of consolidated net income for the year.

Explanation of Solution

Computation of consolidated net income for the year:

Particulars	Amount
Consolidated revenues	$      30,000,000
Consolidated expenses	$      22,200,000
Income before impairment loss	$        7,800,000
Goodwill impairment loss	$      33,106,000
Net loss	$    (25,306,000)

Table: (4)

d.

To determine

Determine the balance of December 31 consolidated balance for goodwill.

Explanation of Solution

Computation of consolidated goodwill for the year:

$\begin{array}{c}\text{Consolidated}\text{goodwill}=\$50,000,000-\$33,106,000\\ =\$16,894,000\end{array}$

e.

To determine

Determine the balance of December 31 consolidated balance for broadcast licenses.

Explanation of Solution

Computation of balance of December 31 consolidated balance for broadcast licenses:

$\begin{array}{c}\text{Consolidated}\text{broadcast}\text{licenses}=\$350,000-\$14,014,000\\ =\$14,364,000\end{array}$

f.

To determine

Prepare a consolidated worksheet for both companies.

Explanation of Solution

Consolidated worksheet for both companies:

Company P and Company L
Consolidated Worksheet
December 31
Income statement	Company P	Company L	Debit	Credit	Consolidated Balances
Revenues	$    (18,000,000)	$  (12,000,000)			$   (30,000,000)
Expenses	$      10,350,000	$    11,800,000	E 50,000		$     22,150,000
Equity earnings from Company L	$         (150,000)		I 150,000		$                     -
Impairment loss	$      33,106,000				$          220,000
Net income	$      25,306,000	$       (200,000)			$     25,306,000
Balance Sheet
Cash	$           260,000	$         109,000			$          369,000
Accounts receivable	$           210,000	$         897,000			$       1,107,000
Investment in Company L	$      86,964,000	$                    -	D 80,000	S 69,500,000
				A 7,394,000	$                     -
				I 150,000
Broadcast licenses	$           350,000	$    14,014,000			$     14,364,000
Movie library	$           365,000	$    45,000,000			$     45,365,000
Equipment	$    136,000,000	$    17,500,000	A 500,000	E 50,000	$   153,950,000
Goodwill	$                      -	$                    -	A 16,894,000		$     16,894,000
Total assets	$    224,149,000	$    77,520,000			$   232,049,000
Current liabilities	$         (755,000)	$       (650,000)			$     (1,405,000)
Long term debt	$    (22,000,000)	$    (7,250,000)			$   (29,250,000)
Common stock	$  (175,000,000)	$  (67,500,000)	S 67,500000		$ (175,000,000)
Retained earnings	$    (26,394,000)	$    (2,120,000)			$   (26,394,000)
Total liabilities and equity	$  (224,149,000)	$  (77,520,000)	$   87,114,000	$    87,114,000	$ (232,049,000)

Table: (5)

Working note:

Statement of retained earnings	Company P	Company L	Debit	Credit	Consolidated Balances
Retained earnings on 01/01	$    (52,000,000)	$       (200,000)	S 2,000,000		$   (52,000,000)
Dividends declared	$           300,000	$           80,000		D 80,000	$          300,000
Net income	$      25,306,000	$       (200,000)			$     25,306,000
Retained earnings on 31/12	$    (26,394,000)	$       (320,000)			$   (26,394,000)

Table: (6)