Question

On September 1, 2020, Peter Corporation acquired Darcy Enterprises for a cash payment of $ 850,000. At the time of purchase, Darcy’s statement of financial position showed assets of $ 890,000, liabilities of $ 450,000, and owner’s equity of $ 440,000. The fair value of Darcy’s assets is estimated to be $ 1,150,000. Assume that Peter is a public company and the goodwill was allocated entirely to one cash-generating unit (CGU). Two years later, the CGU’s carrying amount is $ 3,450,000; its value in use is $ 3,380,000; the fair value less costs to sell is $ 2,980,000.

1. Determine if goodwill is impaired, and calculate the goodwill impairment loss.
2. Record the journal entry for the impairment, if necessary. If not necessary, state that no journal entry is necessary.
3. Explain the concept of a ‘cash generating unit’.

Answer 1

Calculation of goodwill
	Amount ($)
Purchase Consideration	850,000
Less: Net identifable assets	700,000
(1,150,000 - 450,000 )
Goodwill at acquisition	150,000
Impairment loss of goodwill after two years
Particulars	Amount ($)
Recoverable amount ( Higher of 3,380,000 or 2,980,000 )	3,380,000
Less : Carrying amount of CGU excluding goowill	3,300,000	(3,450,000 - 150,000 )
Implied Value of goodwill	80,000
Existing Goodwill	150,000
Less : Implied goodwill	80,000
Impairment loss of goodwill	70,000
The peter corporation should record loss on impairment of goodwill of $ 70,000 .
Journal entry for Impairment
Account Titles	Debit $	Credit $
Impairment loss on goodwill	70,000
Goodwill		70,000
A cash-generating unit is defined as the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets