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Porter Company: Compute goodwill, impairment journal entry

(See attached file for full problem description)

Problem 1

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 acquisition:

Current assets: $ 500,000 Current liabilities $ 400,000
Non-Current assets: $1,800,000 Long-term liabilities $ 300,000
Total Assets: $2,300,000 Stockholders' equity $1,600,000
Total liabilities and
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
Non-current 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 the 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 the 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.


Solution Preview

a) Goodwill = Purchase price - fair value of the identifiable net assets of Dryer
= $2.1M - $1.8M = $.3M

b) Net assets per the balance sheet are $1.2M, ...

Solution Summary

The solution explains the problem and shows the journal entry as requested.