Question

You are the controller of Metatec Inc. At the beginning of 2019, Metatec Inc. acquired Ellison Technology Corporation for $600 million. In addition to cash, receivables, and inventory, the following assets and their fair values were also acquired:

	In Millions
Palant and equipment (depreciable assets)	$        150
Patent	$          40
Goodwill	$        100

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 5-year useful life, no residual value, and is amortized using the straight-line method.

At the end of 2021, a change in business climate indicated to management that the assets of Ellison might be impaired. The following amounts have been determined:

Plant & Equipment:	In Millions
Undiscounted sum of future cash flows	$          80
Fair value	$          60
Patent:
Undiscounted sum of future cash flows	$          20
Fair value	$          13
Goodwill:
Fair value of Ellison Technology Corporation	$        450
Book value of Ellison’s net assets (excluding goodwill)	$        370
Book value of Ellison’s net assets (including goodwill)	$        470

*After first recording any impairment losses on plant and equipment and the patent.

*Please show calculations!

1. Compute the book value of the plant and equipment and patent at the end of 2021.
2. Determine the amount of any impairment loss to be recorded, if any, for the three assets.

Answer 1

Part 1: Calculation of book values of plant$equipment, patent Plant& equipment Fair value of plant&equipment at the beginning of 2019 = Life of plant Depreciation = 150 million/10 years = Million($) 150 10 years Accumulated depreciation at the end of year 2021 ( 3 x 15) 451 Book value at the end of year 2021 = 150 - 45 million = $ 105 million Patent Fair value of Patent at the beginning of 2019 = Life of plant Depreciation for one year = 40 million/5 years = Million($) 40 5 years Accumulated depreciation at the end of year 2021 ( 3 x $8] 24 Book value at the end of year 2021 - 40 - 24 million = $ 16 million

Part 2: Impairment loss Plant and equipment and patent shall be tested for impairment when the book value is greater than its recoverable amount Goodwill be tested for impairment when cashflow losses continue futhur Here in the current situation, the book value of plant &equipment is $105 million, whereas the recoverable amount is just $80 million Hence, as the recoverable amount is less than book value, it should be impaired. Impairment loss is to be recognoized = $105 - 80 = $25 million. There is no need to impair the patent and goodwill as their recoverable amounts are higher than book values.