Question

LL LLLLLLLL B12-19 LO 12.5 SHOW ME HOW I Goodwill Several years ago, Blaha Company purchased Husker Company as a subsidiary. At that time, Blaha recorded aha recorded goodwill of $100.000 related to the purchase. Since that time, the company has not consid- ered the goodwill to 1 awill to be impaired. However, at the end of 2016, Blaha decides to evaluate the goodwill for impair- ment because of technological changes in the industry. Husker (which is considered a reporting unit of Blaha) has a book value ncluding the goodwill) of $800,000. Blaha estimates that the fair value of Husker is $720,000, of which it allocates $660,000 to Husker's identifiable assets and liabilities. Required: 1. Prepare the journal entry (if any) for Blaha to record the impairment of its goodwill at the end of 2016. 2. Assume that Blaha uses IFRS and has estimated the recoverable amount of Husker (which qualifies as a cash-generating-unit) to be $740,000. Prepare the journal entry for Blaha to record the impairment of its goodwill at the end of 2016.

Answer 1

1. Goodwill is tested for impairment using the 2 step impairment test:
Test 1: Comparing the Carrying value of reporting unit (including goodwill) with the Fair value of the reporting unit (including goodwill)

Husker is the reporting unit of Blaha.
Carrying value of Husker (including goodwill) = $800,000
Fair value of Husker (including goodwill) = $720,000
Since carrying value exceeds the Fair value, the reporting unit may be impaired.

Test 2: Comparing the Carrying value of goodwill with Implied value of Goodwill.
Carrying value of Goodwill = $100,000
Implied value of Goodwill = FV of Husker (including goodwill) - FV of Husker (excluding goodwill)
= $720,000 - $660,000 = $60,000.
Since, carrying value > implied value (100,000 > 60,000), the reporting unit is impaired
Goodwill Impairment Loss = $100,000 - $60,000 = $40,000
Journal entry:
Impairment Loss account Dr. $40,000
To Goodwill Account $40,000

2. Under IFRS accounting, Impairment is calculated using one step model at CGU level.
Carrying value is compared with the Recoverable Amount.
Carrying value = $800,000
Recoverable value shall be the Higher of Fair Value and the Value in use = $740,000.
Since CV>FV , impairment exists.
Impairment loss = $800,000 - 740,000 = $60,000.
Journal entry to record impairment loss:

Impairment Loss Account Dr. $60,000
To Goodwill Account $60,000