Question

Computing goodwill impairment freeman co. acquired another business and paid (among other amounts) $18,000 for its goodwill in year 1. on december 31 of year 3 the net book value of the business is $220,000 and the fair value of the business is $212,500. determine the amount of goodwill impairment (if any) on december 31 of year 3. assume no impairment losses were recognized on goodwill in prior periods.

note: do not use a negative sign with your answer.

Answer 1

There is no goodwill impairment on December 31 of year 3 for Freeman Co. as the net assets value excluding the goodwill ($202,000) is less than the fair value ($212,500) of the business.

Step-by-step explanation:

To calculate the amount of goodwill impairment, compare the net book value of the acquired business to the fair value as of the impairment testing date. On December 31 of year 3, Freeman Co.'s net book value was $220,000, but the fair value was $212,500. Since no impairment losses were previously recognized, the goodwill impairment would be the difference in these two values only if the book value of net assets excluding goodwill exceeds the fair value of the business. However, in this case, the question only provides the book value after goodwill has been included (from the year 1 purchase).

To determine the impairment loss, subtract the fair value from the book value, which is initially assumed to include the goodwill value. If $18,000 was paid for goodwill, we subtract this from the net book value of $220,000, leaving us with a net asset value excluding goodwill of $202,000. Since $202,000 is less than the fair value of $212,500, there is no goodwill impairment. Goodwill impairment would only be recognized if the net assets excluding goodwill were higher than the fair value of $212,500.