Question

Assume that the equity method Equity Investment account relating to a subsidiary has a reported balance of $2,950,000, including $150,000 of Goodwill. The fair value of the subsidiary is $2,750,000. The fair value of the subsidiary’s individually identifiable net assets is $2,500,000. The subsidiary has only one reporting unit, which is the same as the overall entity.

a. Should you perform a test for potential impairment of goodwill?
b. If so, do you conclude that goodwill is impaired?
c. Prepare the required journal entry ID where you find the goodwill asset to be impaired.

Answer 1

Yes, a test for potential impairment of goodwill should be performed. Goodwill is impaired as the carrying amount is greater than the implied fair value. The journal entry to record the impairment of goodwill is a debit to Loss on Impairment of Goodwill and a credit to Goodwill.

Step-by-step explanation:

a. Yes, you should perform a test for potential impairment of goodwill. In accordance with accounting standards, a company should test for impairment of goodwill at least annually or more frequently if events or changes in circumstances indicate that impairment may have occurred. In this case, the fair value of the subsidiary is less than the carrying amount of the equity investment, which may indicate potential impairment of goodwill.

b. To determine if goodwill is impaired, you need to compare the carrying amount of goodwill ($150,000) with its implied fair value. The implied fair value is calculated by allocating the fair value of the subsidiary to its identifiable net assets, excluding goodwill. In this case, the fair value of the subsidiary's individually identifiable net assets is $2,500,000, which means the implied fair value of goodwill is $0. Since the carrying amount of goodwill is greater than its implied fair value, you can conclude that goodwill is impaired.

c. The journal entry to record the impairment of goodwill would be:

Debit: Loss on Impairment of Goodwill ($150,000)

Credit: Goodwill ($150,000)