Question

On September 1, 20X1 AWL used some excess cash and purchased a 30% interest (60,000 common shares at $15 each) in a major importing firm named Canada Importers Ltd. (CIL). When this happened, the CEO of AWL joined the board of CIL. The cost of the investment was $900,000 and AWL intends to hold this investment for a long time. At that time, CIL had assets of $4,000,000 and liabilities of $1,600,000 but the land had a fair value in excess of its carrying amount of $100,000 and a building with a fair value in excess of its carrying amount of $300,000. The building had a remaining life of 15 years as at September 1, 20X1. CIL has a December 31 year-end as does AWL and CIL reported net income of $160,000 for that year. Dividends were declared only once during the year, on December 27, by CIL of $40,000 but none of these were to be paid until 20X2. At December 31, 20X1 the CIL share price was at $10. The drop in the share price has occurred because a customer sued CIL for selling contaminated goods. Shareholders that have a more significant percentage of CIL stock have written off any goodwill relating to their investment.

What would be the journal entries? I am particularily confused about how to write off goodwill.

Answer 1

Net Assets of CIL on Sept. 1, 20X1 = $4,000,000 - $1,600,000 = $2,400,000

30% of Net Assets = $720,000

Fair Value of Net Assets of CIL on Sept. 1, 20X1 = $2,400,000 + $100,000 + $300,000 = $2,800,000

30% of Fair Value = $840,000

Purchase Price of Investments = $900,000

Goodwill = $900,000 - $840,000

= $60,000

All the above calculations are on acquisition.

At the end of the year, the value of Investments in the books of AWL is as follows:

But due to decline in share prices, the value of investments is $600,000 (60,000 x $10).

There is a loss of $348,000, out of this goodwill is to written off to $0, depreciation of excess Fairvalue of Building is to be written off. Remaining is to be treated as loss on impairment.

Loss on Impairment = $348,000 - $60,000 - [($300,000/15)x3/12]

= $288,000 - $5,000

= $283,000

The journal entry would be as follows:

Impairment of Goodwill, depreciation of excess Fairvalue of Building are to be effected through Equity in earnings account and the remaining loss is on impairment which is shown as impairment loss.

Since Dividend is not yet received in cash, we need not pass the entry for Dividends.