Case ID: 3254     Solution ID: 22641     Words: 2296 Price $ 75

The Talbots Inc and Subsidiaries Accounting for Goodwill Case Solution

Case Solution

In 2006, Talbots, Inc. a merchandiser who sold women's apparel only, acquired a competitor player, J. Jill. The contract led to a lot of goodwill account, as well as gave way to accounts that were related to trademarks and other immaterial assets. Making use of the existing accounting standards (Statement of Financial Accounting Standards No. 142), Talbots computed that the goodwill was not hampered in the Fiscal Year 2007 and was carried to the following years at the cost of purchase. One year afterward, however, Talbots found that the goodwill was damaged, as were the trademarks and some other in-store assets which were purchased from J.Jill in 2006. These damages were then subtracted from the profits of the Fiscal Year 2008. The case has financial statements attached.

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?