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.

Required

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.

Answer 1

Impairment is required for the CGU if recoverable amount of CGU is less than the carrying amount.

In the present case, we have the following:

Carrying amount of CGU = $3,450,000

Recoverable amount of CGU - Higher of value in use or fair value less costs to sell

Since value in use is higher, recoverable amount = $3,380,000

Since recoverable amount ($3,380,000) is lower than the carrying amount of CGU ($3,450,000), following impairment loss needs to be recorded:

Impairment loss = $3,450,000 - $3,380,000 = $70,000

Entry to be passed for recording impairment loss:

Date	Account title and explanations	Debit	Credit
XX	Impairment loss	70,000
	Goodwill		70,000
	(Being impairment of CGU recorded)