Question

Felhofer Inc. purchased McKinley Marine on June 1, 2012 for $25,000,000 and recorded goodwill of $3,100,000 in connection with the purchase. At December 31, 2015, the McKinley Marine Division had a fair value of $25,400,000. The net identifiable assets of McKinley (including goodwill) had a fair value of $24,900,000 at that time. What amount of loss on impairment of goodwill should Felhofer record in 2015?

Answer 1

To calculate the impairment loss on goodwill, compare the fair value of the reporting unit with its carrying amount. The impairment loss for Felhofer Inc.'s goodwill associated with McKinley Marine is $2,600,000, calculated by subtracting the implied fair value of goodwill from its carrying amount.

Step-by-step explanation:

To determine the impairment loss on goodwill, we must compare the fair value of the reporting unit with its carrying amount. According to the information provided, Felhofer Inc. purchased McKinley Marine and allocated $3,100,000 to goodwill. On December 31, 2015, the fair value of the McKinley Marine Division was $25,400,000, but the fair value of the net identifiable assets, including goodwill, was only $24,900,000.

This indicates that the carrying amount of the reporting unit, which includes goodwill, exceeds its fair value, signaling a potential impairment. To calculate the impairment loss, we must first determine the implied fair value of goodwill, which is the fair value of McKinley Marine minus the fair value of net identifiable assets excluding goodwill. Subtracting $24,900,000 from $25,400,000 results in an implied fair value of goodwill of $500,000. Since the carrying amount of goodwill is $3,100,000, the impairment loss will be the difference between these two amounts, which is $2,600,000.

Therefore, Felhofer Inc. should record an impairment loss of $2,600,000 for the goodwill associated with the McKinley Marine Division for the year ended December 31, 2015.