Question

Modern Company acquires the net assets of Frontier Company for $1,300,000 on January 1, 2011. A business valuation consultant arrives at the price and deems it to be a good value.
Part A. The following list of fair values is provided to you by the consultant:
Required
Using the information in the preceding table, confirm the accuracy of the present value calculations made for the building, patent, and mortgage payable.
Part B. Frontier does not have publicly traded stock. You make an estimate of the value of the company based on the following assumptions that will later be included in the reporting unit valuation procedure:
a. Frontier will provide operating cash flows, net of tax, of $150,000 during the next fiscal year.
b. Operating cash flows will increase at the rate of 10% per year for the next four fiscal years and then will remain steady for 15 more years.
c. Cash flows, defined as net of cash from operations less capital expenditures, will be discounted at an after-tax discount rate of 12%. An annual rate of 12% is a reasonable risk-adjusted rate of return for investments of this type.
d. Added capital expenditures will be $100,000 in year 5, $120,000 in year 10, and $130,000 in year 15.
e. An estimate of salvage value (net of the tax effect of gains or losses) of the assets after 20 years is estimated to be $300,000. This is a conservative assumption since the unit may be operated after that period.
Required
1. Prepare a schedule of net-of-tax cash flows for Frontier and discount them to present value.
2. Compare the estimated fair value of the reporting unit with amounts assigned to identifiable assets plus goodwill less liabilities.
3. Record the acquisition.
Part C. Revisit the information in Part A that illustrates the reporting unit valuation procedure. Assume that by fiscal year-end, December 31, 2011, events occur that suggest goodwill could be impaired. You have the following information. These new estimates are made at the end of the first year:
Net book value of Frontier Company including goodwill ......... $1,300,000
Estimated implied fair value of the reporting unit, based on cash flow
analysis discounted at a 12% annual rate ............... 1,200,000
Estimated fair value of identifiable net assets using methods excluding
Goodwill............................. 1,020,000
Required
Has goodwill been impaired? Perform the impairment testing procedure. If goodwill has been impaired, calculate the adjustment to goodwill and make the needed entry.


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  • CreatedApril 10, 2015
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