Question

Company A bought Company B in 2015 and appropriately recorded $750,000 of goodwill related to the purchase. On December 31, 2019, the fair value of Company B is $5,200,000 and it is carried on Company A’s books at a total book value of $5,800,000, including the goodwill. An analysis of Company B’s assets indicates that the fair value of the net assets of the division total $5,100,000 on December 31, 2019. What goodwill impairment should be recognized by Company A in 2019?

Answer 1

Company A and B

Impairment of Goodwill = $700,000

Step-by-step explanation:

Goodwill on acquisition in 2015 = $750,000

Fair value of Company B in 2019 = $5,200,000

Book value of Company B in Company A = $5,800,000

Assessed fair value of Company B = $5,100,000

Goodwill impairment = $5,100,000 - $5,800,000 = $700,000

Company A's Goodwill impairment arises when the carrying amount of Goodwill in Company A exceeds the fair value of Company B. It is important to check for impairment of goodwill annually. The purpose of assessing goodwill for impairment is to ensure that the carrying amount of goodwill does not exceed the fair value.