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    Impairment loss

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    On May 31, 2004, Porter Company paid $2,100,000 to acquire all of the common stock of Dryer Corporation, which became a division of Porter. Dryer reported the following balance sheet at the time of the acquisition:

    Current assets $500,000 current liabilities $400,000
    noncurrent assets $1,800,000 long-term liabilities $300,000

    total assets $2,300,000 total liabilities & stockholders equity $2,300,000

    It was determined at the date of the purchase that the fair value of the identifiable net assets of Dryer was $1,800,000. At December 31, 2004, Dryer reports the following balance sheet information:

    current assets $400,000
    noncurrent assets
    (including goodwill recognized in purchase) $1,600,000
    current liabilities (500,000)
    long-term liabilities (300,000)
    net assets $1,200,000

    It is determined that the fair market value of the Dryer division is $1,250,000. The recorded amount for Dryer's net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value of $150,000 above carrying value.

    (a) Compute the amount of goodwill recognized, if any, on May 31, 2004.
    (b) Determine the impairment loss, if any, to be recorded on December 31, 2004.
    (C) Assume that the fair value of Dryer division is $1,100,000 instead of $1,250,000. Prepare the journal entry to record the impairment loss, if any, on December 31, 2004.

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    Solution Summary

    The solution explains how to determine the amount of goodwill and so find out if there is any impairment loss.