Question

On January 1, Year 1, East Company purchased $60,000 of goodwill. On December 31, Year 4 East determined 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. Which of the following journal entries was required to recognize the impairment?

Answer 1

The journal entry to recognize a $25,000 impairment of goodwill on East Company's books would include a debit to Impairment Loss on Goodwill and a credit to Goodwill, reflecting the loss in the asset's value.

Step-by-step explanation:

The question relates to the concept of impairment of an intangible asset – specifically goodwill – within the field of accounting. When the student asks about the journal entry required to recognize the impairment, they are referring to the point in time when East Company determined that their goodwill suffered a $25,000 impairment.

Ignoring the recovery mentioned for Year 6, as accounting standards typically do not allow the reversal of goodwill impairment, the journal entry to record the impairment on December 31, Year 4 would be a debit to a loss account (such as Impairment Loss on Goodwill) and a credit to the Goodwill account to reflect the decrease in value:

• Debit: Impairment Loss on Goodwill $25,000
• Credit: Goodwill $25,000

This entry recognizes the loss in the value of goodwill in East Company's financial statements. Goodwill is not amortized, but it is tested annually for impairment, and when an impairment loss is recognized, it reduces the carrying value of the goodwill on the balance sheet and the loss is reflected on the income statement.