Question

Following its acquisition of the net assets of Dan Company, Empire Company assigned goodwill of $60,000 to one of the reporting divisions. Information for this division follows:

Carrying Amount Fair Value
Cash $ 20,000 $ 20,000
Inventory 35,000 40,000
Equipment 125,000 160,000
Goodwill 60,000
Accounts Payable 30,000 30,000

Based on the preceding information, what amount of goodwill will be reported for this division - after any necessary impairments - if the fair value of the entire reporting unit is determined to be $200,000?
A) $0
B) $60,000
C) $30,000
D) $50,000

Answer 1

The impairment of goodwill is calculated by comparing the fair value of the reporting unit ($200,000) with the carrying amount of its net assets including goodwill ($210,000), which results in an impairment loss of $10,000. Therefore, the goodwill reported for this division after necessary impairments would be $50,000.

Step-by-step explanation:

The question pertains to the impairment of goodwill in a business reporting unit following an acquisition. To determine the amount of goodwill that will be reported after any necessary impairments, we compare the fair value of the reporting unit with the carrying amount of its net assets, including goodwill.

First, calculate the net assets excluding goodwill. The carrying amounts are:

• Cash: $20,000
• Inventory: $35,000
• Equipment: $125,000
• Less: Accounts Payable: ($30,000)

The net assets excluding goodwill total $150,000. When adding the goodwill of $60,000, the total carrying amount is $210,000.

Since the fair value of the reporting unit is $200,000, which is less than the carrying amount, an impairment is necessary. The impairment loss is the difference between the carrying amount and the fair value, which is $210,000 - $200,000 = $10,000.

Thus, the amount of goodwill after impairment is the original goodwill minus the impairment loss:

Goodwill after impairment = $60,000 - $10,000 = $50,000