Question

At the beginning of 2022 , Metatec Incorporated acquired Ellison Technology Corporation for $540 million. In addition to cash, receivables, and inventory, the following assets and their fair values were also acquired: 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: *After first recording any impairment losses on plant and equipment and the patent. equired:

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. Complete this question by entering your answers in the tabs below. Determine the amount of any impairment loss to be recorded, if any, for the three assets. Note: Enter your answers in millions rounded to 1 decimal place. For example, $5,500,000 should be entered as $5.5. equired: 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. Complete this question by entering your answers in the tabs below. Compute the book value of the plant and equipment and patent at the end of 2024. Note: Enter your answers in millions rounded to 1 decimal place. For example, $5,500,000 should be entered as $5.5.

Answer 1

To compute the book value of the plant and equipment and patent at the end of 2024, subtract the accumulated depreciation or amortization from the initial cost of each asset.

Step-by-step explanation:

To compute the book value of the plant and equipment and patent at the end of 2024, we need to understand what book value means. Book value is the value at which an asset is carried on the balance sheet. It is calculated by subtracting accumulated depreciation or amortization from the initial cost of the asset. In this case, the plant and equipment are depreciated over a 10-year useful life with no residual value, while the patent is amortized over a 5-year useful life with no residual value. Therefore, we can calculate the book value by subtracting the accumulated depreciation or amortization from the initial cost of each asset.

The plant and equipment have an initial cost of $600 million and have been depreciated for 3 years. The annual depreciation expense is $600 million divided by 10 years, which is $60 million per year. Therefore, the accumulated depreciation for the plant and equipment at the end of 2024 is $60 million multiplied by 3 years, which is $180 million. The book value of the plant and equipment at the end of 2024 is $600 million minus $180 million, which is $420 million.

The patent has an initial cost of $300 million and has been amortized for 3 years. The annual amortization expense is $300 million divided by 5 years, which is $60 million per year. Therefore, the accumulated amortization for the patent at the end of 2024 is $60 million multiplied by 3 years, which is $180 million. The book value of the patent at the end of 2024 is $300 million minus $180 million, which is $120 million.

Answer 2

In this case, goodwill should be tested for impairment at the end of 2024.

How to solve

Compute the book value of the plant and equipment and patent at the end of 2024.

Plant and equipment:

Original cost: $150 million

Accumulated depreciation: $30 million ($150 million / 10 years * 3 years)

Book value: $120 million

Patent:

Original cost: $90 million

Accumulated amortization: $36 million ($90 million / 5 years * 4 years)

Book value: $54 million

When should the plant and equipment and the patent be tested for impairment?

Plant and equipment:

The plant and equipment need an impairment test whenever signs show possible impairment, like decreased fair value, reduced profitability, or an early sale or disposal expectation before their useful life ends.

Patent:

The patent needs an impairment test if there are signs of possible impairment, such as decreased value, reduced profitability, or an expectation of abandoning it before its useful life ends.

When should goodwill be tested for impairment?

Goodwill requires an annual impairment test. Additionally, if there are signs of possible impairment—like reduced business unit value, profitability, or a plan to sell—the goodwill should be tested.

In this case, goodwill should be tested for impairment at the end of 2024.