At the beginning of 2022, Metatec Incorporated acquired Ellison Technology Corporation for $650 million. In addition to cash, receivables, and inventory, the following assets and their fair values were also acquired: Plant and equipment (depreciable assets) Patent Goodwill $ 155 million 45 million 120 million The plant and equipment are depreciated over a 10-year useful life on a straight-line basis. There is no estimated residual value. The patent is estimated to have a five-year useful life, no residual value, and is amortized using the straight-line method. At the end of 2024, a change in business climate indicated to management that the assets of Ellison might be impaired. The following amounts have been determined: Plant and equipment: Undiscounted sum of future cash flows Fair value Patent: Undiscounted sum of future cash flows Fair value Goodwill: Fair value of Ellison Technology Corporation Book value of Ellison's net assets (excluding goodwill) Book value of Ellison's net assets (including goodwill) $ 85 million 65 million $ 20 million 14 million $ 505 million 440 million 520 million* After first recording any impairment losses on plant and equipment and the patent. Required: 1. Compute the book value of the plant and equipment and patent at the end of 2024. 2. When should the plant and equipment and the patent be tested for impairment? 3. When should goodwill be tested for impairment? 4. Determine the amount of any impairment loss to be recorded, if any, for the three assets.
At the beginning of 2022, Metatec Incorporated acquired Ellison Technology Corporation for $650 million. In addition to cash, receivables, and inventory, the following assets and their fair values were also acquired: Plant and equipment (depreciable assets) Patent Goodwill $ 155 million 45 million 120 million The plant and equipment are depreciated over a 10-year useful life on a straight-line basis. There is no estimated residual value. The patent is estimated to have a five-year useful life, no residual value, and is amortized using the straight-line method. At the end of 2024, a change in business climate indicated to management that the assets of Ellison might be impaired. The following amounts have been determined: Plant and equipment: Undiscounted sum of future cash flows Fair value Patent: Undiscounted sum of future cash flows Fair value Goodwill: Fair value of Ellison Technology Corporation Book value of Ellison's net assets (excluding goodwill) Book value of Ellison's net assets (including goodwill) $ 85 million 65 million $ 20 million 14 million $ 505 million 440 million 520 million* After first recording any impairment losses on plant and equipment and the patent. Required: 1. Compute the book value of the plant and equipment and patent at the end of 2024. 2. When should the plant and equipment and the patent be tested for impairment? 3. When should goodwill be tested for impairment? 4. Determine the amount of any impairment loss to be recorded, if any, for the three assets.
Chapter14: Property Transactions: Capital Gains And Losses, § 1231, And Recapture Provisions
Section: Chapter Questions
Problem 75P
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Transcribed Image Text:At the beginning of 2022, Metatec Incorporated acquired Ellison Technology Corporation for $650 million. In addition to cash,
receivables, and inventory, the following assets and their fair values were also acquired:
Plant and equipment (depreciable assets)
Patent
Goodwill
$ 155 million
45 million
120 million
The plant and equipment are depreciated over a 10-year useful life on a straight-line basis. There is no estimated residual value. The
patent is estimated to have a five-year useful life, no residual value, and is amortized using the straight-line method.
At the end of 2024, a change in business climate indicated to management that the assets of Ellison might be impaired. The following
amounts have been determined:
Plant and equipment:
Undiscounted sum of future cash flows
Fair value
Patent:
Undiscounted sum of future cash flows
Fair value
Goodwill:
Fair value of Ellison Technology Corporation
Book value of Ellison's net assets (excluding goodwill)
Book value of Ellison's net assets (including goodwill)
$ 85 million
65 million
$ 20 million
14 million
$ 505 million
440 million
520 million*
After first recording any impairment losses on plant and equipment and the patent.
Required:
1. Compute the book value of the plant and equipment and patent at the end of 2024.
2. When should the plant and equipment and the patent be tested for impairment?
3. When should goodwill be tested for impairment?
4. Determine the amount of any impairment loss to be recorded, if any, for the three assets.
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