Advanced Financial Accounting 12th Edition by Theodore Christensen solution manual

 
This means the total amount assigned to goodwill may be divided among a number of reporting units. Goodwill assigned to each reporting unit must be tested for impairment annually and between the annual tests in the event circumstances arise that would lead to a possible decrease in the fair value of the reporting unit below its carrying amount [ASC 350-20-35-30, ASU 2017-04].
 
As long as the fair value of the reporting unit is greater than its carrying value, goodwill is not considered to be impaired. If the fair value is less than the carrying value, an impairment loss must be reported for the amount by which the carrying amount of reporting unit exceeds its  fair value. However, the impairment cannot exceed the amount of goodwill originally recognized for that reporting unit [ASC 350-20-35-11, ASU 2017-04]
 
At the date of acquisition, Plush Corporation recognized goodwill of $20,000 ($450,000 - $430,000) and assigned it to a single reporting unit. Even though the fair value of the reporting unit increased to $485,000 at December 31, 20X5, Plush Corporation must test for impairment of goodwill if the carrying value of Plush’s investment in the reporting unit is above that amount. That would be the case if the carrying value were determined to be $500,000. If the carrying value of the reporting unit’s net assets exceeds the fair value of the reporting unit’s net assets, an impairment is recorded for the amount by which the carrying amount exceeds the fair value (but the impairment is limited to the amount of goodwill reported by that unit). If the carrying amount were $500,000 and the fair value of the reporting unit were $485,000, The impairment would be $15,000 ($500,000 - $485,000). On the other hand, if the fair value were greater than the carrying value, there would be no goodwill impairment. For example, if the carrying value of the reporting unit were determined to be $470,000, there would be no impairment.
 
With the information provided, we do not know if there has been an impairment of the goodwill involved in the purchase of Common Corporation. However, Plush must follow the procedures outlined here in testing for impairment at December 31, 20X5.
 
Primary citations
ASC 350-20-35-11
ASC 350-20-35-30
ASC 350-20-35-41
ASU 2017-04
 
 
C1-5 Risks Associated with Acquisitions
 
Alphabet discloses on pages 9-10 of its 2016 Form 10-K that acquisitions, investments, and divestitures are an important part of its corporate strategy. The company goes on to discuss relevant risks associated with these activities. The specific risk areas identified include:
 
The use of management time on acquisitions-related activities may temporarily divert management’s time and focus from normal operations.
After acquiring companies, there is a risk that Alphabet may not successfully develop the business and technologies of the acquired firms.
It can be difficult to implement controls, procedures, and policies appropriate for a public company that were not already in place in the acquired company.
Integrating the accounting, management information, human resources, and other administrative systems can be challenging.
The company sometimes encounters difficulties in transitioning operations, users, and customers into Alphabet’s existing platforms.
Government “red tape” in obtaining necessary approvals can reduce the potential strategic benefits of acquisitions.
There are many difficulties associated with foreign acquisitions due to differences in culture, language, economics, currencies, politic, and regulation.
Since corporate cultures can vary significantly, there are potential difficulties in integrating the employees of an acquired company into the Google organization.
It can be difficult to retain employees who worked for companies that Alphabet acquires.
There may be legal liabilities for activities of acquired companies.
Litigation of claims against acquired companies or as a result of acquisitions can be problematic.
Anticipated benefits of acquisitions may not materialize.
Acquisitions through equity issuances can result in dilution to existing shareholders. Similarly, the issuance of debt can result in other costs. Impairments, restructuring charges, and other unfavorable results can result.
 
C1-6 Leveraged Buyouts
 
a. A leveraged buyout (LBO) involves acquiring a company in a transaction or series of planned transactions that include using a very high proportion of debt, often secured by the assets of the target company. Normally, the investors acquire all of the stock or assets of the target company. A management buyout (MBO) occurs when the existing management of a company acquires all or most of the stock or assets of the company. Frequently, the investors in LBOs include management, and thus an LBO may also be an MBO