Question

On January 1, Year 1, East Company purchased West Company. East Company paid $600,000 cash and assumed all of West Company's liabilities. West's books showed tangible assets of $550,000, liabilities of $40,000,and equity of $590,000. An appraiser assessed the fair market value of the tangible assets at $580,000 at the date of acquisition. On December 31, Year 4 East determines that the goodwill suffered a $25,000 permanent impairment. However, on December 31, Year 6 East estimated that it had recovered $5,000 of the impairment that had previously been considered to be a permanent impairment. Based on this information, the book value of the goodwill shown on the December 31, Year 6 balance sheet is

Answer 1

The book value of goodwill on the December 31, Year 6 balance sheet would be $35,000. This is after initially recognizing the goodwill at $60,000 at the acquisition date, adjusting for an impairment loss of $25,000 on December 31, Year 4, and not reversing the impairment despite a partial recovery of $5,000 on December 31, Year 6 due to accounting standards typically not allowing for the reversal of goodwill impairments.

Step-by-step explanation:

The book value of goodwill shown on the balance sheet is calculated by initially recognizing goodwill at the time of acquisition and then adjusting it for any impairment losses over the years. When East Company acquired West Company, the purchase price was $600,000 with tangible assets having a fair market value of $580,000 and liabilities assumed at $40,000. Goodwill is calculated as the excess of purchase consideration over the net assets at fair market value, which would be:

• Goodwill = Purchase consideration - (Fair value of tangible assets - Liabilities)
• Goodwill = $600,000 - ($580,000 - $40,000) = $60,000

However, this goodwill suffered an impairment of $25,000 on December 31, Year 4. Adjusting for the impairment:

• Impaired Goodwill = Original Goodwill - Impairment
• Impaired Goodwill = $60,000 - $25,000 = $35,000

On December 31, Year 6, it was estimated that $5,000 of the impairment had been recovered. Accounting standards generally do not allow the reversal of impairment losses for goodwill. Therefore, the book value remains unchanged at the impaired amount:

• Book Value of Goodwill (Dec 31, Year 6) = Impaired Goodwill = $35,000