Reference no: EM132676364
Question - On January 1, Palisades, Inc., acquired 100 percent of Sherwood Company's common stock for a fair value of $120,480,000 in cash and stock. The carrying amounts of Sherwood's assets and liabilities equaled their fair values except for its equipment, which was undervalued by $548,000 and had a 10-year remaining life.
Palisades specializes in media distribution and viewed its acquisition of Sherwood as a strategic move into content ownership and creation. Palisades expected both cost and revenue synergies from controlling Sherwood's artistic content (a large library of classic movies) and its sports programming specialty video operation. Accordingly, Palisades allocated all of Sherwood's assets and liabilities (including all $49,640,000 of goodwill recognized in the acquisition) to a newly formed operating segment appropriately designated as a reporting unit.
However, Sherwood's assets have taken longer than anticipated to produce the expected synergies with Palisades's operations. Accordingly, Palisades reviewed events and circumstances and concluded that Sherwood's fair value was likely less than its carrying amount. At year-end, Palisades assessed the Sherwood reporting unit's fair value to $110,480,000.
At December 31, Palisades and Sherwood submitted the following balances for consolidation. There were no intra-entity payables on that date. Also, Palisades had not yet recorded any goodwill impairment.
Palisades, Inc. Sherwood Co.
Revenues $(18,570,000) $(12,480,000)
Operating expenses 10,350,000 12,280,000
Equity in Sherwood's earnings (145,200)
Dividends declared 420,000 128,000
Retained earnings, 1/1 (52,720,000) (2,552,000)
Cash 487,000 133,000
Receivables (net) 258,000 921,000
Investment in Sherwood 120,497,200
Broadcast licenses 470,000 14,062,000
Movie library 485,000 45,480,000
Equipment (net) 131,240,000 17,740,000
Current liabilities (209,000) (770,000)
Long-term debt (22,035,000) (7,490,000)
Common stock (170,240,000) (67,740,000)
Required -
1. What is the relevant test to determine whether goodwill is impaired?
2. How did Palisades determine Sherwood's December 31 carrying amount of $120,497,200?
3. At what amount should Palisades record an impairment loss for its Sherwood reporting unit for the year?
4. What is consolidated net income for the year?
5. What is the December 31 consolidated balance for goodwill?
6. Make a consolidated worksheet for Palisades and Sherwood (Palisades's trial balance should first be adjusted for any appropriate impairment loss).