In: Accounting
On September 1, 2019, Undisputed Corporation acquired TLC Enterprises for a cash payment of $850,000. At the time of purchases, TLC’s balance sheet showed assets of $620,000, liabilities of $240,000, and owner's equity of $420,000. The fair value of TLC’s assets is estimated to be $970,000.
A: Compute the amount of goodwill acquired by Undisputed Corporation.
On September 30th, 2020 assume the TLC Enterprises Division of Undisputed Corporation has the following balance sheet. Assets (including goodwill): $1,030,000 – 350,000= 680k net asset Liabilities: 350,000 Equity: 680,000
B: Based on the above information, Assuming the FMV of the division is $750,000, determine the Goodwill Impairment to be recorded (and prepare the journal entry)
C: Independently from “B”, now Assuming the FMV of the division is $650,000 determine the Goodwill impairment to be recorded (and prepare the journal entry)
(A) The Amount of goodwill = Purchase price ( cash payment ) - Net Assets purchased
Net assets purchased = Fair value of assets - Laibilities
Net assets purchased = 970000 - 240000 = 730000
Purchase price = 850000
The amount of goodwill = $ 850000 - $ 730000 = $ 120000
(B) Carrying value of net assets= $ 680000
Fair value or market value = $ 750000
Here, market value is greater than carrying value.
If fair value or market value is greater than carrying value, then there is no need of impairment of goodwill.
Thus no jounal entry is required.
(C) The goodwill Impairment = $ 30000
Particular | Debit ($) | Credit($) |
Loss on impairment of Goodwill | 30000 | |
To Goodwill | 30000 | |
( To record impaiment loss on goodwill ) |
Working : Goodwill Impairment ( Impairment loss) = Book value of goodwill – Implied value of goodwill
Implied value of goodwill = Fair value of Division- Fair value of net assets (excluding goodwill)
Implied value of goodwill = 650000 - ( 680000 - 120000 ) = $ 90000
Goodwill Impairment ( Impairment loss) = $ 120000 - $ 90000 = $ 30000