Question

Jacky Inc. purchased Manzanita Marine on June 1, 2018 for $25,000,000 and recorded goodwill of $3,100,000 in connection with the purchase. At December 31, 2021, the Manzanita Marine Division had a fair value of $25,400,000. The carrying amount of the net assets of Manzanita (including goodwill) had a value of $24,900,000 at that time. What amount of loss on impairment of goodwill should Jacky record in 2021?

A. $0.
B. $500,000.
C. $2,600,000.
D. $600,000.

Answer 1

There is no impairment loss on the goodwill for Jacky Inc.'s purchase of Manzanita Marine since the fair value is higher than the carrying amount; thus, the answer is $0 option (a).

Step-by-step explanation:

The question relates to the accounting concept of impairment of goodwill. Goodwill is tested for impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill.

If the carrying amount of the reporting unit, including goodwill, exceeds its fair value, an impairment loss must be recognized in the amount of that excess, limited to the total amount of goodwill allocated to that reporting unit.

Based on the information provided, Manzanita Marine Division has a fair value of $25,400,000 and the carrying amount is $24,900,000. As the fair value exceeds the carrying amount, there is no impairment loss, and hence, no loss should be recorded for the goodwill. Therefore, the correct answer is A. $0.