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On January 1 Prine Inc acquired 100 percent of Lydia Company’s common stock for a fair value of $120,000000 in cash and stock Lydia’s assets and liabilities equaled their fair values except for

On January 1 Prine Inc acquired 100 percent of Lydia Company’s common stock for a fair value of $120,000000 in cash and stock Lydia’s assets and liabilities equaled their fair values except for

On January 1, Prine, Inc., acquired 100 percent of Lydia Company’s common stock for a fair value of $120,000,000 in cash and stock. Lydia’s assets and liabilities equaled their fair values except for its equipment, which was undervalued by $500,000 and had a 10-year remaining life.

Prine specializes in media distribution and viewed its acquisition of Lydia as a strategic move into content ownership and creation. Prine expected both cost and revenue synergies from controlling Lydia’s artistic content (a large library of classic movies) and its sports pro- gramming specialty video operation. Accordingly, Prine allocated Lydia’s assets and liabilities (including $50,000,000 of goodwill) to a newly formed operating segment appropriately desig- nated as a reporting unit.

The fair values of the reporting unit’s identifiable assets and liabilities through the first year of operations were as follows.

 

 

Fai alues

 

Account

1/1

12/31

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 215,000

$ 109,000

Receivables (net) . . . . . . . . . . . . . . . . . . . . . . . . . . .

525,000

897,000

Movie library (25-year life) . . . . . . . . . . . . . . . . . . . .

40,000,000

60,000,000

Broadcast licenses (indefinite life) . . . . . . . . . . . . . .

15,000,000

20,000,000

Equipment (10-year life) . . . . . . . . . . . . . . . . . . . . .

20,750,000

19,000,000

Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .

(490,000)

(650,000)

Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(6,000,000)

(6,250,000)

 

However, Lydia’s assets have taken longer than anticipated to produce the expected synergies with Prine’s operations. Accordingly, Prine reviewed events and circumstances and concluded that Lydia’s fair value was likely less than its carrying amount. At year-end, Prine reduced its assess- ment of the Lydia reporting unit’s fair value to $110,000,000.

At December 31, Prine and Lydia submitted the following balances for consolidation:

 

 

 

 

Revenues . . . . . . . . . . . . . . . . . . . . . . . . .

Prine Inc.

$ (18,000,000)

ydi Co.

$(12,000,000)

Operating expenses . . . . . . . . . . . . . . . . .

10,350,000

11,800,000

Equity in Lydia earnings . . . . . . . . . . . . . .

(150,000)

NA

Dividends paid . . . . . . . . . . . . . . . . . . . . .

300,000

80,000

Retained earnings, 1/1 . . . . . . . . . . . . . . .

(52,000,000)

(2,000,000)

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . .

260,000

109,000

Receivables (net) . . . . . . . . . . . . . . . . . . .

210,000

897,000

Investment in Lydia . . . . . . . . . . . . . . . . .

120,070,000

NA

Broadcast licenses . . . . . . . . . . . . . . . . . .

350,000

14,014,000

Movie library . . . . . . . . . . . . . . . . . . . . . .

365,000

45,000,000

Equipment (net) . . . . . . . . . . . . . . . . . . . .

136,000,000

17,500,000

Current liabilities . . . . . . . . . . . . . . . . . . .

(755,000)

(650,000)

Long-term debt . . . . . . . . . . . . . . . . . . . .

(22,000,000)

(7,250,000)

Common stock . . . . . . . . . . . . . . . . . . . .

(175,000,000)

(67,500,000)

 

a. What is the relevant initial test to determine whether goodwill could be impaired?

At what amount should Prine record an impairment loss for its Lydia reporting unit for the year?

What is consolidated net income for the year?

d. What is the December 31 consolidated balance for goodwill?

What is the December 31 consolidated balance for broadcast licenses?

Prepare a consolidated worksheet for Prine and Lydia (Prine’s trial balance should first be adjusted for any appropriate impairment loss).

Tripti 10-Jul-2020

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