Merger and Consolidation, Goodwill Impairment

Stockholders of Acme Company, Baltic Company, and Colt Company are considering alternative arrangements for a business combination. Balance sheets and the fair values of each company"s assets on October 1, 2011, were as follows:

Â	Acme	Baltic	Colt
Assets	$3,900,000	$7,500,000	$ 950,000
Liabilities	$2,030,000	$2,200,000	$ 260,000
Common stock, $20 par value	2,000,000	1,800,000	540,000
Other contributed capital	-0-	600,000	190,000
Retained earnings (deficit)	(130,000)	2,900,000	(40,000)
Total equities	$3,900,000	$7,500,000	$ 950,000
Fair values of assets	$4,200,000	$9,000,000	$1,300,000

Acme Company shares have a fair value of $50. A fair (market) price is not available for shares of the other companies because they are closely held. Fair values of liabilities equal book values.

Required:

1. Prepare a balance sheet for the business combination. Assume the following: Acme Company acquires all the assets and assumes all the liabilities of Baltic and Colt Companies by issuing in exchange 140,000 shares of its common stock to Baltic Company and 40,000 shares of its common stock to Colt Company.
2. Assume, further, that the acquisition was consummated on October 1, 2011, as described above. However, by the end of 2012, Acme was concerned that the fair values of one or both of the acquired units had deteriorated. To test for impairment, Acme decided to measure goodwill impairment using the present value of future cash flows to estimate the fair value of the reporting units (Baltic and Colt). Acme accumulated the following data:

Year	Amen: Value of future Cash Rows	Carrying Value of Identifiable Net Assets*	Fair Value Identifiable Net Assets
2012
Baltic	$6,500,000	$6,340,000	$6,350,000
Colt	$1,900,000	1,200,000	1,000,000

*Identifiable Net Assets do not include goodwill.

Prepare the journal entry, if needed, to record goodwill impairment at December 31, 2012.