Question

Ayayai Corporation purchased Kingbird Company 3 years ago and at that time recorded goodwill of $300,000. The Kingbird Division's net assets, including goodwill, have a carrying amount of $650,000. The fair value of the division is estimated to be $620,000. Prepare Ayayai's journal entry, if necessary, to record impairment of goodwill.

a. Debit Loss on Impairment $30,000, Credit Goodwill $30,000
b. Debit Goodwill $30,000, Credit Loss on Impairment $30,000
c. Debit Goodwill $620,000, Credit Loss on Impairment $30,000, Credit LOI $30,000
d. Debit Loss on Impairment $30,000, Credit Goodwill $620,000

Answer 1

The correct journal entry to record the impairment of goodwill is to debit Loss on Impairment and credit Goodwill for the same amount.

Step-by-step explanation:

When the fair value of an acquired division is less than its carrying amount, an impairment loss on the goodwill should be recorded. In this case, the fair value of the Kingbird Division is $620,000, which is less than its carrying amount of $650,000. To record the impairment, we need to debit Loss on Impairment for $30,000 and credit the Goodwill account for the same amount. Therefore, the correct journal entry to record the impairment of goodwill is:

Debit Loss on Impairment $30,000
Credit Goodwill $30,000