Destin Company recently acquired several businesses and recognized goodwill in each acquisition. Destin has allocated the resulting goodwill to its three reporting units: Sand Dollar, Salty Dog, and Baytowne. Destin opts to skip the qualitative assessment and therefore performs a quantitative goodwill impairment review annually.
In its current year assessment of goodwill, Destin provides the following individual asset and liability values for each reporting unit:
| Carrying Amounts | Fair Values | |||||
| Sand Dollar | ||||||
| Tangible assets | $ | 227,000 | $ | 243,400 | ||
| Trademark | 228,000 | 203,900 | ||||
| Customer list | 123,750 | 137,650 | ||||
| Goodwill | 135,000 | ? | ||||
| Liabilities | (41,250 | ) | (41,250 | ) | ||
| Salty Dog | ||||||
| Tangible assets | $ | 212,000 | $ | 212,000 | ||
| Unpatented technology | 251,000 | 203,500 | ||||
| Licenses | 110,000 | 127,300 | ||||
| Goodwill | 202,900 | ? | ||||
| Baytowne | ||||||
| Tangible assets | $ | 158,500 | $ | 175,900 | ||
| Unpatented technology | 0 | 156,000 | ||||
| Copyrights | 74,500 | 107,000 | ||||
| Goodwill | 108,500 | ? | ||||
The fair values for each reporting unit (including goodwill) are $654,700 for Sand Dollar, $750,800 for Salty Dog, and $760,900 for Baytowne. To date, Destin has reported no goodwill impairments.
a.Determine which of Destin’s reporting units require both steps to test for goodwill impairment.
b.How much goodwill impairment should Destin report this year?
a.
Determine which of Destin’s reporting units require both steps to test for goodwill impairment.
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b.
How much goodwill impairment should Destin report this year? (If any of the reporting units do not require both steps to test for goodwill, select NA from the dropdown list.)
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Part 1)
Both the steps to test for goodwill impairment will be required only if Step 1 (total fair value is less than total carrying value) is satisfied. The following table is used to perform Step 1:
| Total Fair Value | Total Carrying Value | Potential Goodwill Impairment | Remarks | |
| Sand Dollar | 654,700 | 672,500 (227,000+228,000+123,750+135,000-41,250 | Yes | Carrying Value > Fair Value, Step 1 Satisfied |
| Salty Dog | 750,800 | 775,900 (212,000+251,000+110,000+202,900) | Yes | Carrying Value > Fair Value, Step 1 Satisfied |
| Baytowne | 760,900 | 341,500 (158,500+0+74,500+108,500) | No | Carrying Value < Fair Value, Step 1 Not Satisfied |
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Tabular Representation as Required in Question:
| Sand Dollar | Yes |
| Salty Dog | Yes |
| Baytowne | No |
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Part 2)
We will have to perform Step 2 for units for which Step 1 was satisfied. The goodwill will be impaired to the extent the implied value of goodwill is less than the carrying value of goodwill. Step 2 is performed as below:
| Sand Dollar - Total Fair Value | 654,700 | |
| Fair Value of Identifiable Net Assets | ||
| Tangible Assets | 243,400 | |
| Trademark | 203,900 | |
| Customer List | 137,650 | |
| Liabilities | -41,250 | 543,700 |
| Implied Value of Goodwill (654,700 - 543,700) | 111,000 | |
| Carrying Value of Goodwill (given) | 135,000 | |
| Impairment Loss (135,000 - 111,000) | $24,000 | |
| Salty Dog - Total Fair Value | 750,800 | |
| Fair Value of Identifiable Net Assets | ||
| Tangible Assets | 212,000 | |
| Unpatented Technology | 203,500 | |
| Licenses | 127,300 | 542,800 |
| Implied Value of Goodwill (750,800 - 542,800) | 208,000 | |
| Carrying Value of Goodwill | 202,900 | |
| No Impairment (Carrying Value < Implied Value of Goodwill) |
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Tabular Representation as Required in Question:
| Sand Dollar | Impairment Loss | $24,000 |
| Salty Dog | No Impairment | $0 |
| Baytowne | NA | $0 |
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