On January 1, Prine, Inc., acquired 100 percent of Lydia Company's common stock for a fair value of $130,869,000 in cash and stock. Lydia’s assets and liabilities equaled their fair values except for its equipment, which was undervalued by $690,000 and had a 10-year remaining life.

On January 1, Prine, Inc., acquired 100 percent of Lydia Company's common stock for a fair value of $130,869,000 in cash and stock. Lydia’s assets and liabilities equaled their fair values except for its equipment, which was undervalued by $690,000 and had a 10-year remaining life.

Prine specializes in media distribution and viewed its acquisition of Lydia as a strategic move into content ownership and creation. Prine expected both cost and revenue synergies from controlling Lydia's artistic content (a large library of classic movies) and its sports programming specialty video operation. Accordingly, Prine allocated Lydia’s assets and liabilities (including $55,551,000 of goodwill) to a newly formed operating segment appropriately designated as a reporting unit.

The fair values of the reporting unit’s identifiable assets and liabilities through the first year of operations were as follows.

 

	Fair Values
Account	1/1			12/31
Cash	$	282,000		$	327,500
Receivables (net)		542,000			935,000
Movie library (25-year life)		44,200,000			69,520,000
Broadcast licenses (indefinite life)		15,710,000			21,090,000
Equipment (10-year life)		21,430,000			19,940,000
Current liabilities		(566,000	)		(842,500	)
Long-term debt		(6,280,000	)		(6,400,000	)

 

However, Lydia’s assets have taken longer than anticipated to produce the expected synergies with Prine’s operations. Accordingly, Prine reviewed events and circumstances and concluded that Lydia’s fair value was likely less than its carrying amount. At year-end, Prine reduced its assessment of the Lydia reporting unit’s fair value to $121,840,000.

At December 31, Prine and Lydia submitted the following balances for consolidation:

 

Account	Prine, Inc.			Lydia Co.
Revenues	$	(23,400,000	)	$	(16,400,000	)
Operating expenses		15,700,000			15,000,000
Equity in Lydia earnings		(1,331,000	)		NA
Dividends paid		300,000			150,000
Retained earnings, 1/1		(68,900,000	)		(7,128,000	)
Cash		671,000			327,500
Receivables (net)		410,000			935,000
Investment in Lydia		132,050,000			NA
Broadcast licenses		527,500			14,900,000
Movie library		367,500			49,700,000
Equipment (net)		142,000,000			17,700,000
Current liabilities		(795,000	)		(134,500	)
Long-term debt		(22,600,000	)		(7,550,000	)
Common stock		(175,000,000	)		(67,500,000	)

 

a.	What is the relevant initial test to determine whether goodwill could be impaired?
b.	At what amount should Prine record an impairment loss for its Lydia reporting unit for the year? (Input the amount as a positive value.)
c.	What is consolidated net income\loss for the year? (Input the amount as a positive value.)
d.	What is the December 31 consolidated balance for goodwill?
e.	What is the December 31 consolidated balance for broadcast licenses?
f.	Prepare a consolidated worksheet for Prine and Lydia (Prine's trial balance should first be adjusted for any appropriate impairment loss). (Leave no cells blank - be certain to enter "0" wherever required. Enter consolidation entries for Investment in Lydia Co. in the order of (S) Elimination of subsidiary’s stockholders’ equity, (A) Allocation of subsidiary’s acquisition-date excess fair values over book values and (I) Elimination of parent's equity in subsidiary's income.Input all amounts as positive values except for the credit balances which should be entered with the minus sign.)

 

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