Accounting for Goodwill Harvard Case Solution & Analysis

Case Summary

Talbot Company is an internationally specialized retailer and express marketer involved in the Women accessories, apparel and shoes. The company is very much famous in their locality with their best quality. In contrast,J. Jill is also involved in the women`s accessories which is much more well-known in their locality. Now the Talbot wants to acquire J. Jill because both are dealing in the same industry and gaining more customer attention. They acquired this company one year ago. Now the problem they are facing after a useful acquisition is in computation of Good will through amortization method or impairment method in accordance with generally accepted accounting principles (GAAP).

The company intendsto know about the acquisition`s effects from 2007 to 2008 as well as the method of goodwill valuation. They also want to know about the effects ofImpairment and amortization to goodwill valuation.. Basically In 2001 GAAP uses the method of goodwill amortization till the next 40 years to reduce the impact of goodwill in financial statements. While amortization, it cursory portrays the effects on financial statements of the entity. However, it is a dilemma that the entity failed to assimilate the circumstances under which goodwill is to be impaired and measured accordingly. The treatment of the transaction is discussed in the separate questions which are given in this report.

While computing goodwill, an enterprise has to consider rules of law and relevant accounting standards and their lawful implications.

Problem Statement

The main problem of Talbot Corporation is to deal with the amortization and impairment effects of Goodwill and Intangible with the acquisition of J. Jill Corporation under the guidelines of the Generally Accepted Accounting Principle (GAAP) standardsand Financial Accounting Standards Board (FASB). The treatment of goodwill is different according to the standards. Therefore, the solution is made with somesome of the assumptions stated in the case study material. The effects of the 2008 impairment are the actual measurement of the fair value and discounted cash flow of the future profit. The major impact of the net income is done with the taxes and restructuring losses.

Question 1

Answer 1

How much cash was paid to shareholders by J. Jill?

The consideration paid by the Talbot is $ 518,320,000 in the form of cash. This cash was paid on 3rd May, 2006 to the shareholders of J. Jill.The cash represents $400,000,000 from borrowing and the rest is taken from the company’s cash in hand. Talbot has also borne the burden of interest which will come after a year.

How many shares of J. Jill was purchased by Talbots?

The Share of J. Jill was acquired in the number of 211,551,767 which is mentioned in the excel file named as acquisition details. This extraction is done from the total value of cash payment divided byper share value. Shares are representing the addition in the Talbots` shares.

Why were Talbots willing to pay more than the fair value of the tangible assets acquired from J. Jill?

The reason for giving excess price because of the J. Jill has more reputation in the market as well as their efficiencies. The J. Jill has great goodwill in terms of customer relationship, favorable leasehold interest and trademark.

What was the fair market value of assets that Talbots acquired from J. Jill?

The fair market value of the Talbot tangible assets is $687,572,000. This value is given in the case material which is essential in the calculation of the J. Jill worth.

What were the liabilities (including the $400 million cash obtained through debtfinancing) assumed by Talbots in the acquisition of J. Jill?

The liabilities are assumed by the Talbots in the acquisition of J. Jill is current liabilities of $55,662,000, deferred income taxes $95,699,000, debt (loan) $400,000,000 and long-term liabilities of another $11,820,000 with the total of $563,181,000. That’s all part of the calculations which is shown in the excel file as well as mentioned in this report.

These all calculation are depicted in “Appendix A”

Question 2

Answer 2

What journal entry(s) was required when Talbots recorded the purchase of J. Jill?

The journal entries are done in accordance with accounting standards of the board which is given in the “Appendix B”. Pleasego through the appendix and excel for the understanding of accounting entries.

Question 3

Answer 3

In the fiscal year 2007 with the ending on Feb 3, 2007 the amortization of other intangibles assets and goodwill is prepared with the understanding of the practical approach of the amortization, which is mentioned in the excel file name as Amortization schedule and also mention in the..................

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