Problem NO: 5

On July 31, 2014, Mexico Company paid $3,000,000 to acquire all of the common stock of Conchita Incorporated, which became a division of Mexico. Conch

On July 31, 2014, Mexico Company paid $3,000,000 to acquire all of the common stock of Conchita Incorporated, which became a division of Mexico. Conchita reported the following balance sheet at the time of the acquisition.

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It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was $2,750,000. Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31, 2014, Conchita reports the following balance sheet information.

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It is determined that the fair value of the Conchita Division is $1,850,000. The recorded amount for

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Conchita’s net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value $150,000 above the carrying value.

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Instructions

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(a) Compute the amount of goodwill recognized, if any, on July 31, 2014.

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(b) Determine the impairment loss, if any, to be recorded on December 31, 2014.

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(c) Assume that fair value of the Conchita Division is $1,600,000 instead of $1,850,000. Determine the impairment loss, if any, to be recorded on December 31, 2014.

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(d) Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement.

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Salaries and Other Expenses

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Number Employee (excluding Building of Projects Benefits Depreciation Charges)

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Completed projects with long-term benefits 15 $ 90,000 $50,000

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Abandoned projects or projects that benefit the current period 10 65,000 15,000

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Projects in process—results indeterminate 5 40,000 12,000

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Total 30 $195,000 $77,000

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Current assets $ 800,000 Current liabilities $ 600,000

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Noncurrent assets 2,700,000 Long-term liabilities 500,000

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Total assets $3,500,000 Stockholders’ equity 2,400,000

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Total liabilities and stockholders’ equity $3,500,000

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Current assets $ 450,000

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Noncurrent assets (including goodwill recognized in purchase) 2,400,000

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Current liabilities (700,000)

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Long-term liabilities (500,000)

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Net assets $1,650,000

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