Accounting Graduate Work: Amortization expense and Consolidated Income Statements and Balance Sheets

Impairment testing Goodwill: 

Summary:
 Amortization expense – identifiable intangibles $ 2,600,000. Impairment losses – identifiable intangibles 12,100,000. Goodwill impairment loss 135,000,000. With a Total $149,700,000

Impairment testing – identifiable intangibles: Book value = $4,000,000 – 2 x ($4,000,000/4) = $2,000,000. Book value > Sum of discounted cash flows? $2,000,000 > $900,000: Yes. Impairment loss = $2,000,000 - $900,000 = $1,100,000.

Book value = $8,000,000 – 1.5 x ($8,000,000/5) = $5,600,000. Book value > Sum of discounted cash flows? $5,600,000 > $4,400,000: Yes. Impairment loss = $5,600,000 – $4,400,000 = $1,200,000.

Book value = $18,000,000. Book value > (greater than) Sum of discounted cash flows? $18,000,000 > $7,000,000: Yes. Impairment loss = $18,000,000 - $7,000,000 = $11,000,000.

Impairment testing for Goodwill: Summary: Amortization expense – identifiable intangibles $ 2,600,000. Impairment losses – identifiable intangibles 13,300,000. Goodwill impairment loss140,000,000. Total $155,900,000.

[a](amounts in millions)

[b]Parson reports its own income of $800 million plus its equity in the income of Soaper of $140 million. Equity in the income of Soaper is Soaper’s reported income adjusted for write-offs of Soaper’s net asset revaluations. Consolidated income is Parson’s and Soaper’s reported revenues and expenses, with Soaper’s expenses adjusted for the revaluation writeoffs. Parson’s separately reported income and consolidated income therefore report the same items, packaged differently.

Calculation of total goodwill is as follows: Calculation of adjustment to investment balance to convert it to complete equity method at January 1, 2013: Consolidation working paper eliminating entries for 2013:

[A][C][E]Stockholders’ equity, January 1, 2013 = $5,000,000 + 1,300,000 – 400,000 = $5,900,000.

[R]Revaluations at January 1, 2013 = original revaluations less writeoffs for 2007-2012.[O]

Goodwill
8,000,000


Identifiable intangibles
4,000,000



Land, buildings and equipment
6,800,000


Investment in Salem
5,200,000

Operating expenses

2,100,000

Land, buildings and equipment

400,000


Goodwill

500,000

Identifiable intangibles

2,000,000


Next:

Salem’s reported net income

$ 2,500,000

Revaluation writeoffs:

Land, buildings and equipment depreciation

400,000

Identifiable intangibles amortization

(2,000,000)

Goodwill impairment loss

(500,000)

Equity in income of Salem

$ 400,000

Original cost   $ 16,000,000
Change in Salem’s retained earnings to 1/1/14
   $14,000,000
3 years land, buildings and equipment depreciation
$1,200,000
3 years identifiable intangibles amortization
($6,000,000)
Goodwill impairment loss to 1/1/14
($2,000,000)
Investment balance, 1/1/14
$23,200,000
Equity in net income, 2014
$400,000
Investment balance, 12/31/14
$23,600,000

	Customer lists	Brand names
Book value > undiscounted cash flows?	No	Yes
Fair value		$3,400,000
Book value		5,200,000
Impairment loss	--	$1,800,000

	Division 1	Division 2
Step one: Division book value > fair value?	Yes	Yes
Step two:
Fair value of goodwill	$1,000,000	$8,000,000
Book value of goodwill	1,600,000	6,400,000
Impairment loss	$ 600,000	-0-

	Division 1	Division 2
Fair value of division	$14,000,000	$20,000,000
Book value of division	16,000,000	24,000,000
Potential goodwill impairment	2,000,000	4,000,000
Actual impairment loss	$ 1,600,000	$ 4,000,000

	Customer lists	Brand names
Fair value	$1,200,000	$3,400,000
Book value	1,500,000	5,200,000
Impairment loss	$ 300,000	$1,800,000

Investment in Saddlestone		10,300,000
Merger expenses		250,000
	Capital stock		10,000,000
	Contingent consideration liability		300,000
	Cash		250,000

Saddlestone’s reported net income	$ 3,000,000
Revaluation writeoff:
Identifiable intangibles $2,000,000/5	(400,000)
Equity in net income of Saddlestone	$ 2,600,000

Investment in Saddlestone		2,600,000
	Equity in net income of Saddlestone		2,600,000

Cash		1,000,000
	Investment in Saddlestone		1,000,000

Acquisition cost	$ 10,300,000
Book value of Saddlestone	(7,200,000)
Excess of acquisition cost over book value	3,100,000
Identifiable intangibles	(2,000,000)
Goodwill	$ 1,100,000

Equity in net income of Saddlestone		2,600,000
	Dividends – Saddlestone		1,000,000
	Investment in Saddlestone		1,600,000

Stockholders’ equity—Saddlestone, 1/1		7,200,000
	Investment in Saddlestone		7,200,000

Identifiable intangibles		2,000,000
Goodwill		1,100,000
	Investment in Saddlestone		3,100,000

Amortization expense		400,000
	Identifiable intangibles		400,000

Eliminating Entries after First and Second Years

Safeco’s reported net income	$ 1,600,000
Revaluation writeoffs:
Equipment $500,000/5	(100,000)
Inventory	(200,000)
Goodwill impairment loss	(50,000)
Equity in net income of Safeco	$ 1,250,000

Investment in Safeco		8,000,000
	Cash		8,000,000

Investment in Safeco		1,250,000
	Equity in net income of Safeco		1,250,000

Cash		600,000
	Investment in Safeco		600,000

Acquisition cost		$ 8,000,000
Book value of Safeco		(7,000,000)
Excess of acquisition cost over book value		1,000,000
Fair value less book value:
Equipment	$ 500,000
Inventory	200,000	(700,000)
Goodwill		$ 300,000

Equity in net income of Safeco		1,250,000
	Dividends – Safeco		600,000
	Investment in Safeco		650,000

Stockholders’ equity—Safeco, 1/1		7,000,000
	Investment in Safeco		7,000,000

Equipment, net		500,000
Inventory		200,000
Goodwill		300,000
	Investment in Safeco		1,000,000

Depreciation expense		100,000
Cost of goods sold		200,000
Goodwill impairment loss		50,000
	Equipment, net		100,000
	Inventory		200,000
	Goodwill		50,000

Safeco’s reported net income	$ 2,000,000
Revaluation writeoff:
Equipment $500,000/5	(100,000)
Equity in net income of Safeco	$ 1,900,000

Investment in Safeco		1,900,000
	Equity in net income of Safeco		1,900,000

Cash		800,000
	Investment in Safeco		800,000

Equity in net income of Safeco		1,900,000
	Dividends – Safeco		800,000
	Investment in Safeco		1,100,000

Stockholders’ equity—Safeco, 1/1		8,000,000
	Investment in Safeco		8,000,000

Equipment, net		400,000
Goodwill		250,000
	Investment in Safeco		650,000

Depreciation expense		100,000
	Equipment, net		100,000

Goodwill Impairment Losses

Amortization expense for 2014:

Customer relationships	$4,000,000/4	$ 1,000,000
Favorable leaseholds	$8,000,000/5	1,600,000
Total		$2,600,000

Customer relationships

Favorable leaseholds

Brand names

Reporting Unit
Unit FV < BV? 

Asia: $400,000,000 > $300,000,000: No 

South America: $350,000,000> $200,000,000: No
Europe:   $500,000,000< $600,000,000: Yes 

Fair Value of GW: Europe- $500,000,000 – 385,000,000 = 115,000,000 

GW impairment loss: Europe: $250,000,000 – 115,000,000 = $135,000,000



Identifiable Intangibles and Goodwill, IFRS

Amortization expense for 2014:

Customer relationships	$4,000,000/4	$ 1,000,000
Favorable leaseholds	$8,000,000/5	1,600,000
Total		$2,600,000

Customer relationships

Favorable leaseholds

Brand names

Reporting Unit	Unit FV < BV?	GW impairment loss
E. Asia	$150,000,000 < $200,000,000: Yes	$200,000,000 – 150,000 = $50,000,000; impairment limited to full goodwill balance of $40,000,000.
Indonesia	$120,000,000 > $100,000,000: No
Brazil	$140,000,000 >$130,000,000: No
Mediterranean	$190,000,000 < $220,000,000: Yes	$220,000,000 – 190,000,000 = $30,000,000
Scandinavia	$230,000,000 < $300,000,000: Yes	$300,000,000 – 230,000,000 = $70,000,000

Consolidated Income Statement

Sales $5,000 + 2,000	$7,000
Cost of goods sold $3,000 + 800 + 160	3,960
Gross margin	3,040
Depreciation expense $500 + 140 – (200/10)	620
Interest expense $100 + 60 + (100/5)	180
Other expenses $600 + 700	1,300
Total operating expenses	2,100
Net income	$ 940

Consolidation Using Cost Method

Acquisition cost	$ 7,500,000
Book value of Baker	(5,000,000)
Excess of acquisition cost over book value	2,500,000
Fair value less book value:
Buildings	(1,000,000)
Goodwill	$ 1,500,000

Baker reported income, 2007-2012	$ 1,300,000
Baker reported dividends, 2007-2012	(400,000)
Revaluation writeoffs, 2007-2012:
Buildings ($1,000,000/25) x 6	(240,000)
Adjustment to Investment in Baker, 1/1/13	$ 660,000

Investment in Baker		660,000
	Stockholders’ equity –Adam		660,000

Dividend income – Adam		100,000
	Dividends – Baker		100,000

Stockholders’ equity—Baker, 1/1		5,900,000
	Investment in Baker		5,900,000

Buildings, net		760,000
Goodwill		1,500,000
	Investment in Baker		2,260,000

Depreciation expense		40,000
Goodwill impairment loss		100,000
	Buildings, net		40,000
	Goodwill		100,000

College Cranium: Accounting Example 1

Santo’s reported net income	$ 5,000,000
Revaluation writeoffs:
Inventory (1)	(2,000,000)
Plant assets $8,000,000/8	(1,000,000)
Patents $1,500,000/4	(375,000)
Long-term debt $1,000,000/10	100,000
Goodwill impairment loss	(400,000)
Equity in net income of Santo	$ 1,325,000

Consolidation Working Paper, December 31, 2014
Trial Balances Taken From Books
Dr (Cr)
Eliminations
Ponon
Santo
Dr (DEBIT)
Cr(CREDIIT)
Consolidated
Balances
Cash and receivables
$ 4,500,000
$ 3,100,000
$ 7,600,000
Inventory
5,000,000
5,200,000
(R) 2,000,000
2,000,000 (O-1)
10,200,000
Plant assets, net
8,000,000
12,000,000
(R) 8,000,000
1,000,000 (O-2)
27,000,000
Investment in Santo 26,325,000
--
1,325,000 (C)
10,000,000 (E)
15,000,000 (R)
--
Patents --
--
(R) 1,500,000
375,000 (O-3)
1,125,000
Goodwill --
--
(R) 4,500,000
400,000 (O-5)
4,100,000
Current liabilities (5,100,000)
(2,000,000)
(7,100,000)
Long-term debt
(20,000,000)
(3,300,000)
(O-4) 100,000
1,000,000 (R)
(24,200,000)
Capital stock
(8,000,000)
(6,000,000)
(E) 6,000,000
(8,000,000)
Retained earnings, Jan. 1 (4,800,000)
(4,000,000)
(E) 4,000,000
(4,800,000)
Sales
(30,000,000)
(13,200,000)
(43,200,000)

Equity in income of Santos 
(1,325,000)
--
(C) 1,325,000
--
Cost of goods sold 18,000,000
4,000,000
(O-1) 2,000,000
24,000,000
Depreciation and amortization expense 2,000,000
3,200,000
(O-2) 1,000,000
(O-3) 375,000
6,575,000
Interest and other expenses
5,400,000
1,000,000
100,000 (O-4)
6,300,000
GW impairment loss
--
--
(O-5) 400,000
400,000 $ -0- $ -0-
$ 31,200,000 $31,200,000 $ -0-

Consolidated Statement of Income and Retained Earnings For the Year 2014
Sales		$ 43,200,000
Costs of goods sold		(24,000,000)
Gross margin		19,200,000
Operating expenses:
Depreciation and amortization expense	$ 6,575,000
Interest and other expenses	6,300,000
Goodwill impairment loss	400,000	(13,275,000)
Net income		5,925,000
Retained earnings, beginning balance		4,800,000
Retained earnings, ending balance		$ 10,725,000

Consolidated Balance Sheet, December 31, 2014
Assets
Cash and receivables	$ 7,600,000
Inventory	10,200,000
Plant assets, net	27,000,000
Patents	1,125,000
Goodwill	4,100,000
Total assets	$ 50,025,000
Liabilities and stockholders’ equity
Current liabilities	$ 7,100,000
Long-term debt	24,200,000
Capital stock	8,000,000
Retained earnings	10,725,000
Total liabilities and stockholders’ equity	$ 50,025,000

MULTIPLE CHOICE 

ANSWERS

1. b

Goodwill at the date of acquisition is $10,000,000 ( = $16,000,000 – 4,000,000 + 8,000,000 – 10,000,000). Goodwill at 1/1/14 is $10,000,000 – 2,000,000 = $8,000,000.

Land, buildings and equipment revaluation at 1/1/14 is a credit of $8,000,000 – [3 x (8,000,000/20)] = $(6,800,000).

Intangibles revaluation at 1/1/14 = $10,000,000 – [3 x ($10,000,000/5)] = $4,000,000.

Eliminating entry R is as follows:

2.  Eliminating entry O is as follows [b]

3. Calculation of Equity in Net Income [a]

4. c

5. c

6. d

7. c

8. d

9. a

10.  $500,000 – 100,000 = $400,000 [a]

 Consolidation at End of First Year

1. The acquisition entry is as follows:
   Calculation of 2013 equity in net income:
   Peak’s equity method entries for 2013:

2. Calculation of goodwill is as follows: Consolidation working paper eliminating entries for 2013: 
[C],[E],[R],[O]

a. Calculation of equity in net income for 2014:

Peerless’s entries for 2014:

Calculation of goodwill is as follows:

Consolidation working paper eliminating entries for 2014:

[C][E][R][O]

b. Calculation of equity in net income for 2015:

Peerless’s equity method entries for 2015:

The Investment in Safeco balance at December 31, 2015 is $8,000,000 + 1,250,000 – 600,000 + 1,900,000 – 800,000 = $9,750,000.

Consolidation working paper eliminating entries for 2015:

[C][E]

Stockholders’ equity—Safeco at 1/1/2015 = $7,000,000 + 1,600,000 – 600,000 = $8,000,000

[R][O]

[A] Goodwill is not a standalone asset, but represents the value of above-average future performance potential that cannot be assigned to identifiable assets such as property or specific intangible assets. Because performance potential is related to business operations, to measure impairments in its value it must be connected with a specific business unit. In the case of Time Warner, as discussed in the text of Chapter 4, goodwill is assigned to “Networks” as a business unit. The WB Network was one part of this business unit, but did not comprise the entire unit.

[B] First, Time Warner has the option to perform a qualitative analysis to determine if it is more likely than not that the business unit’s book value exceeds its fair value. If so, the fair value of the business unit is calculated and compared with its book value. If book value exceeds fair value, we determine the amount of the impairment, if any, by comparing the fair value of the goodwill with its book value. An impairment loss is reported if book value exceeds fair value. Since The WB Network was shut down, its future performance will no longer benefit Time Warner, and the impairment charge is appropriate. Had the qualitative assessment option been available in 2006, Time Warner would likely have bypassed this option due to strong indicators that The WB Network’s future cash flows were significantly impaired.

[C] Time Warner has a 50% interest in The CW, so under U.S. GAAP it does not have a controlling interest and reports its investment using the equity method. Time Warner’s equity in the net income of The CW is reported as part of consolidated other income. The investment balance is reported as part of consolidated assets. The CW’s individual assets, liabilities, revenues and expenses are not reported on the consolidated financial statements.

Identifiable Intangibles and Goodwill, U.S. GAAP

Impairment testing – identifiable intangibles: Book value = $4,000,000 – 2 x ($4,000,000/4) = $2,000,000.

Book value > Sum of undiscounted cash flows? $2,000,000 > $1,200,000: Yes. Impairment loss = $2,000,000 - $900,000 = $1,100,000.

Book value = $8,000,000 – 1.5 x ($8,000,000/5) = $5,600,000.Book value > Sum of undiscounted cash flows? $5,600,000 < $6,000,000: No.

Book value = $18,000,000. Book value > Sum of discounted cash flows? $18,000,000 > $7,000,000: Yes! Impairment loss = $18,000,000 - $7,000,000 = $11,000,000.

Condensed Consolidated Financial Statements One Year after Acquisition

Calculation of equity in net income for 2014:

(1) Santo’s beginning inventory on its own books is $3,000,000 (= $5,200,000 + 4,000,000 – 6,200,000). Since Santo’s cost of goods sold is $4,000,000, its beginning inventory is completely sold in 2014, and the revaluation is written off. >> b. and c.