The Talbots Inc and Subsidiaries Accounting for Goodwill Case Solution

Case Solution

When students hold the British-language PDF from the Brief Case in the course pack, they'll may also buy a sound version. Around 2006, Talbots, Inc., a distinct segment women's store, purchased a competitor, J. Jill. The transaction created a substantial goodwill account along with comprises about trademarks together with other intangible assets. Using prevailing accounting standards (Statement of financial Accounting Standards No. 142), Talbots determined the goodwill wasn't impaired within the Fiscal Year 2007 plus it was moved forward at its purchase cost. However, twelve several weeks later Talbots found the goodwill impaired, along with the trademarks and several store assets acquired from J. Jill around 2006, which problems were deducted from revenues in Fiscal Year 2008. Case includes financial claims.

Excel Calculations

Fair Market Value of J.Jill's Assets

Fair Value of Liabilities of J.JillJournal entries on Acquisition of J.Jill

Amortization for year ended Febuary 2008

Questions Covered

Use data in Exhibit 1 to understand the purchase on May 3, 2006, of J. Jill by Talbots:

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

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

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

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

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

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

For Fiscal Year 2007 (ending February 3, 2007), make an estimate of the amortization of goodwill and other intangible assets planned by Talbots when it purchased J. Jill on May 3, 2006?

Using Exhibit 3, estimate the amount of amortization or impairment of goodwill associated with J. Jill for Fiscal Year 2008 (ending February 2, 2008) if Statement of Financial Accounting (SFAS) No. 142 had not changed accounting for goodwill in 2001 and Talbots had chosen to amortize goodwill recognized in the purchase of J. Jill over the allowed period of 40 years?

Compare your estimates of income for Fiscal Year 2008 in question 4 to the net loss actually reported after the impairments and reorganization charges taken in FY 2008. Are the differences significant? What would the loss have been without those impairments being recognized?

Many estimates and judgments were made about the fair value of current assets, property and equipment, and other intangible assets. Talbots might have judged these to have greater fair value at May 3, 2006, which would have reduced the goodwill recognized when J. Jill was purchased. In subsequent years, these greater values would have been depreciated or amortized which would have reduced reported income in those future years and reduced income taxes due. Suppose one half of the goodwill recognized had instead been allocated to fixed assets. How might this have affected income and cash flows in future years? How does this compare with the effects of the impairments recognized in FY 2008 which are not deductible for income tax purposes?

In your opinion does the use of unverifiable fair values in financial reporting improve the usefulness of financial reports, or does it merely provide another variable for managements to use opportunistically in their financial reporting processes?