On January 1, 2021, Stewart Corp. acquires a small local company Miller Inc. for $500,000 cash. The following informatio
Posted: Mon May 02, 2022 6:46 am
On January 1, 2021, Stewart Corp. acquires a small local company
Miller Inc. for $500,000 cash. The following information is
disclosed regarding the assets and liabilities of Miller Inc.:
a) Miller owned land and a small manufacturing plant with
a book value of $100,000. An appraisal had been made during the
year, and the plant was appraised at $175,000. Property tax
assessment notices showed that the building’s worth was five times
the worth of the land.
b) Miller’s equipment had a book value of $30,000. It is
estimated that it will take four times the amount of book value to
replace the old equipment with new equipment. The old equipment is
50% depreciated.
c) Miller had a franchise that was then transferred to
Stewart as part of the purchase. Miller carried the asset on its
books at $50,000, the unamortized balance of the original cost of
$100,000. The franchise is for an unlimited time. Similar franchise
are now being sold by the company for $100,000 per geographical
area.
d)
Millerheldtwopatentsonitsproducts.Bothhadbeenfullyamortizedandwerenotcarried
as assets on Stewart’s books. Stewart believes they could have
been sold separately for $75,000 each.
e) Miller has liabilities with fair value of $180,000.
After the acquisition, Miller is considered a cash generating
unit within Stewart Corp. As such cash generating unit includes
goodwill within its carrying amount, it must be tested annually for
impairment. At the end of 2022. Miller’s net assets (excluding
goodwill) has a book value of $350,000. The fair value of Miller
(approximately fair value less costs to sell) is $280,000, and
the present value of Miller’s estimated future cash flows are
$360,000.
Required:
1. Evaluate each of the
items a through e and prepare the journal entry
that should be made to record the purchase on Stewart’s
books.
Should Stewart Corp. recognize goodwill impairment loss in
2022?
Discuss the implications of goodwill impairment on earnings
quality.
Miller Inc. for $500,000 cash. The following information is
disclosed regarding the assets and liabilities of Miller Inc.:
a) Miller owned land and a small manufacturing plant with
a book value of $100,000. An appraisal had been made during the
year, and the plant was appraised at $175,000. Property tax
assessment notices showed that the building’s worth was five times
the worth of the land.
b) Miller’s equipment had a book value of $30,000. It is
estimated that it will take four times the amount of book value to
replace the old equipment with new equipment. The old equipment is
50% depreciated.
c) Miller had a franchise that was then transferred to
Stewart as part of the purchase. Miller carried the asset on its
books at $50,000, the unamortized balance of the original cost of
$100,000. The franchise is for an unlimited time. Similar franchise
are now being sold by the company for $100,000 per geographical
area.
d)
Millerheldtwopatentsonitsproducts.Bothhadbeenfullyamortizedandwerenotcarried
as assets on Stewart’s books. Stewart believes they could have
been sold separately for $75,000 each.
e) Miller has liabilities with fair value of $180,000.
After the acquisition, Miller is considered a cash generating
unit within Stewart Corp. As such cash generating unit includes
goodwill within its carrying amount, it must be tested annually for
impairment. At the end of 2022. Miller’s net assets (excluding
goodwill) has a book value of $350,000. The fair value of Miller
(approximately fair value less costs to sell) is $280,000, and
the present value of Miller’s estimated future cash flows are
$360,000.
Required:
1. Evaluate each of the
items a through e and prepare the journal entry
that should be made to record the purchase on Stewart’s
books.
Should Stewart Corp. recognize goodwill impairment loss in
2022?
Discuss the implications of goodwill impairment on earnings
quality.