Purity Company acquired all of the net assets of Soltice Company on November 1, 20x1. As a result Soltice became a 100% percent owned subsidiary of Purity. After allocating the cost of the net acquisition to the net assets of Soltice, the remainder ($100,000) was reported in the December 31, 20x1 balance sheet as goodwill.
During 20x1 Purity determined that the Soltice office building was undervalued by $40,000 when its provisional amount was determined. Purity depreciates the building using the straight‐line method over a twenty‐year period, beginning November 1, 20x1.
Required:
Address the following questions assuming a tax rate of 40%.
a. At what amount will goodwill now be adjusted to?
b. Under current accounting practice, how will Soltice treat the $40,000 change? Explain and show the journal entry (ies), if any that must be recorded in 20x2.
c. Under the proposed exposure draft issued as a part of the FASB's Simplification Initiative, how will Soltice treat the $40,000 change? Explain and show the journal entry (ies) that would be recorded in 20x2.