Question

Infinity Corporation acquired 80 percent of the common stock of an Egyptian company on January 1, 20X8. The goodwill associated with this acquisition was $18,350. Exchange rates at various dates during 20X8 follow: Jan 1: 1EU=0.1835 Dec. 31 1EU=0.1850 Avg. 1EU=0.1840 Goodwill suffered an impairment of 20 percent during the year. If the functional currency is the Egyptian Pound, how much goodwill impairment loss should be reported on Infinity's consolidated statement of income for 20X8?

Answer 1

The goodwill impairment loss should be converted from dollars to Euros using the exchange rate on the date of the impairment. With an impairment of 20% on the $18,350 goodwill and the December 31 exchange rate, the Euro value of the impairment loss is approximately 19,837.84 EUR.

Step-by-step explanation:

The student is asking about recording a goodwill impairment loss on a consolidated statement of income for a U.S. company that acquired an Egyptian company. To answer this, we must calculate the loss in the Egyptian Pound (functional currency) using the appropriate exchange rate for the impairment date, compare it to the acquisition date, and then convert the loss to Euros (assuming EU means euros). Given that the goodwill was initially valued at $18,350 and suffered a 20% impairment, the impairment loss in dollars would be $18,350 * 20% = $3,670. Because the functional currency is the Egyptian Pound, the impairment loss needs to be converted to Euros using the exchange rate in effect on the date of the impairment. While the actual exchange rate on the impairment date is not provided, the question implies using the December 31 rate of 1EU = 0.1850. The Euro value of the impairment loss is therefore $3,670 * (1/0.1850 EUR/USD) = 19,837.84 EUR (rounded to two decimal places).