Popeye Inc. acquired 400,000 of the 500,000 outstanding common shares of Sailor Limited on July 1, 2013, by issuing 510,000 of its own common shares with an estimated market value of $10 per share and paying cash of $100,000.
On July 1, 2013, Sailor Limited’s financial statements included common shares of $3,000,000 and retained earnings of $2,050,000. All the company’s assets and liabilities were fairly valued except for the following:
Carrying value Fair value
Inventories $1,500,000 $1,650,000
Machinery (at cost) 6,000,000 5,500,000
Accumulated amortization (1,000,000)
Customer list — 500,000
Long-term debt 1,300,000 1,600,000
The inventories were sold by the end of 2013. The fixed assets and customer list had a remaining useful life of five years and ten years respectively on the acquisition date. The long-term debt matures on June 30, 2019. Any goodwill arising from the acquisition was tested for impairment each year. Impairment of $120,000 was determined to have occurred in 2015 and a further impairment of $130,000 in 2016.
(a) Calculate the amount of goodwill that will appear in the consolidated financial statements prepared immediately after the acquisition by Popeye Inc. of its interest in Sailor Limited.
(b) create an amortization and impairment schedule for the acquisition differential arising from this business combination. Your schedule should cover the period from the acquisition date to the end of 2016.