Prepare a fair value allocation and goodwill Corporate Finance
Question 1. Jernigan Corp. reported the following account balances as of 12/31/15:
| Receivables (net) | $90,000 | Liabilities (total) | $510,000 | |
| Inventory | $250,000 | Common Stock | $120,000 | |
| Land | $730,000 | Additional Pd In Capital | $98,000 | |
| Building | $600,000 | Retained earnings 1/1/15 | $846,000 | |
| Revenues, 2015 | $360,000 | |||
| Less Expenses, 2015 | ($264,000) | |||
| $1,670,000 | $1,670,000 |
In addition to the above, several Jernigan accounts have fair values as follows: Land = only $680,000; Building=$720,000; Inventory=$336,000.
Assume all other book values equate to fair value.
Inglewood, Inc. acquired all the outstanding common stock of Jernigan on 12/31/15 by issuing 20,000 Inglewood shares having a $10 par and $70 market value in exchange for Jernigan’s stock. Issuance costs of the new shares was $15,000 cash.
REQUIRED:
a) Prepare a fair value allocation and goodwill (if any) schedule related to the Jernigan acquisition by Inglewood as of 12/31/15.
b) Assume Jernigan Corp. will continue to exist as a wholly-owned subsidiary of Inglewood. Give the necessary entry or entries to record the acquisition on Inglewood’s books at 12/31/15.
c) Assume Jernigan is merged into the Jernigan division of Inglewood, Inc. Give necessary entry to record the acquisition on Inglewood’s books at 12/31/15.
Question 2. Lee Consolidated Industries, Inc. (LCI) acquired all of the common stock of Stuart Corp. on 1/1/2016. As of that date, Stuart Corp. reported the following account balances:
| Stuart Corp. Trial Balance 1/1/2016 | Dr | Cr | |
| Cash and short-term investments | $70,000 | Accounts Payable | $60,000 |
| Accounts Receivable | $50,000 | Long Term Debt ( 3 yrs rem.) | $220,000 |
| Inventory | $110,000 | Common Stock, $10 par | $500,000 |
| Supplies | $20,000 | Additional paid in capital | $90,000 |
| Land | $90,000 | Retained earnings 1/1/16 | $240,000 |
| Equipment (net) –7 year life remaining | $350,000 | ||
| Buildings (net)–14 year life remaining | $420,000 | ||
| Subtotals | $1,110,000 | Subtotals | $1,110,000 |
Assume LCI paid $400,000 in cash for 40% of Stuart’s common stock and issued 30,000 new shares of its own $10 par common at current market value of $24 per share in direct exchange for the remaining 60% of Stuart shares. Issuance cost of the new LCI shares was $10,000. As of 1/1/16 Stuart’s land had a fair value of $120,000, its buildings were valued at $490,000 and its equipment was appraised at $280,000. LCI had a particular interest in Stuart’s internally-developed patents (zero book value) which have a fair value of $200,000 and could be useful to LCI operations. LCI estimates the patents have a 10 year useful life remaining. Any remaining cost of the investment in Stuart is to be allocated to goodwill.
During calendar year 2016, Stuart reported separate net income of $140,000 and paid dividends of $28,000 (all now to LCI).
REQUIRED:
a. Calculate and give the journal entries necessary on LCI’s books for the Stuart acquisition as of 1/1/16:
b. Determine LCI’s ‘Investment in Stuart Corp’ account balance as of 12/31/2016, and necessary journal entries on LCI’s books for the inter-company activity during the 2016 year.
c. Prepare consolidation worksheet entries (S.A.I.D.E. entries) as of 12/31/16. The worksheet itself will not be necessary, to save time.
Question 3. Grant Industries, Inc. agreed to purchase 100% of the common stock of Thomas Technology labs, Inc. as of 1/1/15 for $800,000 cash. As of that date, Thomas’s tangible net assets had a fair value of $550,000. Grant was particularly interested in the proprietary technology that Thomas was developing being classified as in-house R&D, it had zero book value at the time, but all parties believed that Once complete, the technology could develop valuable commercial applications. It was therefore agreed to assign a fair value from the purchase of $100,000 to the in-house technology with, for now, an indeterminate life-not yet to be amortized until it achieved commercial viability. The remaining portion of the purchase price in excess of the FV of net tangible assets and the in-house technology was allocated to goodwill.
Assume it is now 12/31/16 (2 years after the Thomas acquisition.) Grant quickly merged all the and operations of Thomas into its own books as the Thomas Technology Division of Grant industries, lo-Unfortunately, the proprietary technology has not yet developed to a stage that any commercially viable projects could derive from it-R&D is STILL ongoing, and Grant’s executi committee is disappointed.
Grant’s Board of Directors commissioned an outside appraisal of the value of Thomas Division as a unit with the possible view of spinning it off as a separate company; the overall appraisal of Thomas Division came back at $650,000, considerably less than what was originally paid for Thomas. Grant’s CEO then asked for a more specific appraisal of Thomas’s assets with the possible view to selling the assets of separately; the appraisal list came back at a total of $550,000 for the physical assets of Thomas (alit liabilities had since been paid off) and the ongoing technology work was valued in the appraisal at $50,000. The second appraisal declined to measure the value of goodwill, other than to report that they believed the Thomas name itself still had fair credibility in technology circles.
Given the disappointing results of the appraisals, the Grant Board has voted to retain the Thomas Division as a part of Grant Industries for the immediate future in the hopes that the technology may yet pan out to develop a use and help recover the value of Grant’s investment in it. Grant’s CEO, however, now questions the value of Thomas Division goodwill, still booked at its original figure from the merger two years ago.
REQUIRED:
Using the two-step analysis, estimate the implied current value of Thomas’ goodwill and give journal entry for any impairment necessary.
