Question

On April 1, 2021, Chase Supply purchased Sparky Electric Co. for $225,000 Sparky Electric Company’s balance sheet at date of acquistion: Current assets 100,000 Noncurrent assets 280,000 Total assets 380,000 Current Liabilties 30,000 Long term liabilities 150,000 Stockholders' equity 200,000 Total Liabilities and Stockholders' equity 380,000 Fair value of selected assets of Sparky Electric at the date of purchase were as follows: Current assets 102,000 Noncurrent assets 260,000 Long term liabilities 140,000

Compute the amount of goodwill recognized by Chase Supply on the date of purchase. and prepare the journal entry for the acquistion.

Referring to the information above,

Over the next 4 months of operations, the Sparky Division experienced significant
operating losses. It is expected that these losses will continue for the foreseeable future.
At December 31, 2021, Sparky Division reports the following balance sheet information:
Current assets 98,000
Noncurrent assets (including goodwill of 33,000) 260,000
Current Liabilties (50,000)
Long term liabilities (160,000)
NET ASSETS 148,000
It is determined that the fair value of the Sparky Division is now 135,000
Detemine the amount of the impairment loss, if any, to be recorded on December 31,
2021 and prepare the journal entry (if any).

Answer 1

Please note that these calculations and journal entries are based on the information provided. If there are any errors or omissions, please let me know.

To compute the amount of goodwill recognized by Chase Supply on the date of purchase, we need to compare the fair value of Sparky Electric Company's identifiable net assets to the purchase price.

The fair value of selected assets at the date of purchase was as follows:

Current assets: $102,000

Noncurrent assets: $260,000

Long-term liabilities: $140,000

The identifiable net assets can be calculated as follows:

Fair value of current assets + Fair value of noncurrent assets - Fair value of long-term liabilities

= $102,000 + $260,000 - $140,000

= $222,000

The goodwill recognized by Chase Supply is the difference between the purchase price and the identifiable net assets:

Purchase price - Identifiable net assets

= $225,000 - $222,000

= $3,000

Therefore, the amount of goodwill recognized by Chase Supply on the date of purchase is $3,000.

Now let's prepare the journal entry for the acquisition:

Date: April 1, 2021

Account Debit Credit

-----------------------------------------------

Sparky Electric Co. $225,000

Cash $225,000

In this journal entry, Sparky Electric Co. is debited for the purchase price of $225,000, and Cash is credited for the same amount.

Moving on to the impairment loss on December 31, 2021, we need to compare the fair value of the Sparky Division to its carrying amount (net assets).

The fair value of the Sparky Division is given as $135,000, and the carrying amount (net assets) is $148,000.

To determine the impairment loss, we compare the carrying amount to the fair value:

Carrying amount - Fair value

= $148,000 - $135,000

= $13,000

Since the carrying amount is higher than the fair value, an impairment loss needs to be recorded. The impairment loss is $13,000.

Now let's prepare the journal entry for the impairment loss:

Date: December 31, 2021

Account Debit Credit

-----------------------------------------------

Impairment Loss $13,000

Accumulated Impairment Loss $13,000

In this journal entry, Impairment Loss is debited for the amount of $13,000, and Accumulated Impairment Loss is credited for the same amount.