Question

1. Public Enemy (PE) acquired the assets of Beastie Boys (BB) for $15,000,000, at the time PE valued BB’s assets at $10,000,000 and recorded goodwill of $5,000,000 on its balance sheet. After a year, PE tests its assets for impairment and found out that company BB’s revenue has declined. As a result, the current value of company BB’s assets has decreased from $10,000,000 to $7,000,000. Determine if any the impact on goodwill and prepare the impairment entry.

Answer 1

Goodwill arising on consolidation is one form of purchased goodwill.Goodwill arising on consolidation should be capitalised in the consolidated statement of financial position and revalued for impairment every year.

Goodwill arising on consolidation is the diffrence between the cost of acquisition and the value of subsidiary's net assets acquired.

Goodwill on acquisition.

Cost of acquisition = $15,000,000

Less:BB's Net assets = $10,000,000

Goodwill recognised = $5,000,000

BB's Assets decreased from $10,000,000 to $7,000,000, so the impairment loss is $3,000,000.

Impairment loss has to be alloctaed initially to goodwill.

Goowill will be reduced to $2,000,000 ($5,000,000-$3,000,000)

Entry for impairment of Goodwill.

Debit Goodwill Impairment account $3,000,000

Credit Goodwill $3,000,000