Red River Company acquired 100% of the voting stock of the CarStyle Group on January 1 of the current year for a total acquisition cost of $500,000. The trial balance of CarStyle on the date of acquisition follows.

	Debit	Credit
Investment in held-to-maturity securities	60,000
Plant and equipment – net	390,000
Intangible assets – net	140,000
Long-term debt		230,000
Contributed capital		120,000
Retained earnings		240,000
Totals	590,000	590,000

The CarStyle Group acquired the intangible assets 4 years ago. It amortizes the assets using the straight-line method with no estimated residual value. The appraisal of the subsidiary’s net assets on the date of acquisition indicated that the following adjustments were required.

	Book Value	Fair Value	Adjustment
Investment in held-to-maturity securities	60,000	60,000	0
Plant and equipment -- net	390,000	420,000	30 ,000
Intangible assets -- net (other than customer list)	140,000	140,000	0
Customer list	0	100,000	100,000
Long-term debt	(230,000)	(240,000)	(10,000)
Total net assets	360,000	480,000	120,000

On December 31 (1 year after the acquisition of CarStyle), Red River’s management conducted its annual impairment test for goodwill. Management has also assessed recent events and determined that it should review its plant and equipment and finite-life intangible assets for possible impairment. Management determines CarStyle to be the reporting unit, which is also the cash-generating unit. Management estimated that the fair value of the unit (CarStyle) with goodwill 1 year after the acquisition was $600,000; its value in use was $620,000; and the costs to sell were $40,000. The net assets of the unit, excluding goodwill, were appraised at $588,000. Assume that annual depreciation is $10,000, annual amortization for the customer list is $2,000, and the annual amortization for the other intangible assets is $7,000. Red River uses separate accounts for accumulated depreciation and accumulated amortization. Treat the customer list as a finite-life intangible asset. Management is unable to determine fair values for the reporting unit’s assets, but it estimates the following future cash flows for each of the unit’s assets with the exception of goodwill. Assume that Red River’s cost of capital is 5%.

Future Period	Plant and Equipment	Finite-Life Intangible Assets	Customer List
Year 1	103,000	22,000	33,600
Year 2	80,000	20,000	28,400
Year 3	41,000	17,800	21,200
Year 4	28,000	15,400	19,000
Year 5	0	13,000	17,600
Year 6	0	12,000	10,200
Year 7	0	7,800	6,000

Required:

*****PLEASE USE ATTACHED SPREADSHEET*******

Conduct the impairment test for goodwill at the end of the year, 1 year after the acquisition of CarStyle. Assume no changes in the reporting unit’s assets and liabilities except for depreciation and amortization.

*****PLEASE USE THIS SPREADSHEET*******

 

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A Price paid for CarStyle Fair value of the net assets acquired Goodwill B Book value of CarStyle 1 year after acquisition: Initial Initial Book Value Depreciation End Book Value Fair on and of at Value Red River's Amortization First Acquisition Adjustments Books For 1 Year Year Investment securities Plant and equipment Intangible assets - net Customer list Goodwill Long-term debt Net assets (including goodwill) Fair value of CarStyle 1 year after acquisition, including goodwill Book value of the net assets, including goodwill, from table above A Price paid for CarStyle Fair value of the net assets acquired Goodwill B Book value of CarStyle 1 year after acquisition: Initial Initial Book Value Depreciation End Book Value Fair on and of at Value Red River's Amortization First Acquisition Adjustments Books For 1 Year Year Investment securities Plant and equipment Intangible assets - net Customer list Goodwill Long-term debt Net assets (including goodwill) Fair value of CarStyle 1 year after acquisition, including goodwill Book value of the net assets, including goodwill, from table above

Answer rating: 100% (QA)

Amount of Goodwill to Recorded ... View the full answer