Question

3-On July 1, 2019, Captain Company paid $3,000,000 for all of the common stock of Bright Sunshine, Inc. Bright Sunshine's identifiable net assets had a fair value of $2,850,000 at that date. After acquisition, Bright Sunshine was identified as a reporting unit and the goodwill from the acquisition was assigned to that reporting unit. Required: a. Compute the amount of goodwill, if any, from the acquisition. b. Over the remainder of the year, the new unit experienced significant operating losses, suggesting the need for testing of the goodwill for impairment. The fair value of the reporting unit was estimated to be $2,005,000 at December 31. Bright Sunshine's year-end balance sheet showed net assets of $2,100,000, including the goodwill. The fair value of the identifiable net assets of Bright Sunshine at year-end was $1,920,000. Prepare the required journal entry if you find that goodwill is impaired. Perform the pre-ASU 2017-04 quantitative two-step Goodwill impairment test and make the required journal entry for impairment, if necessary. c. Using the same information as above, perform the post-ASU 2017.04 quantitative Goodwill impairment test and make the required journal entry for impairment, if necessary.

Answer 1

Solution

On 1st July, 2019 Captain Company acuire 100% Bright Sunshine Inc,. i.e now it is wholly owed acquisition.

So, treatment of goodwill will be as follows:

a) Investments made = $ 3,000,000

Less : Net identifiable assets = $ 2,850,000

Goodwill = $ 150,000

Now it is said that after aquisition Bright Sunshine was identified as a reporting entity and goodwill from the aquisition assigned to that reporting entity.

b) When testing goodwill for impairment under US GAAP, step are as follows :

First we need to compare Fair value of reporting entity with carrying amount :

Fair Value of Reporting Entity = $ 2,005,000

Carrying amount of Bright Sunshine = $ 2,100,000

This is our first step and here we can not see any indication for the impairment, because our carrying amount is higher then the fair value, now move to next step :

Now Fair value of reporting entity = $ 2,005,000

Net Identifiable assets of entity = $ 1,920,000

Goodwill Impaired = $ 85,000

We can now calculate the goodwill impairment by subtracting the carrying value from the fair value of goodwill:

Impaired Fair value of goodwill = $ 85,000

Less : Carrying value of goodwill = $ (150,000)

Goodwill impairment = $ 65,000

So as per Pre-ASU 2017-04 Goodwill impairment is $ 65000

Journal entry:

Goodwill Impairment A/c Dr 65000

To Goodwill A/c 65000

(Being goodwill impaired)

C) Post-ASU 2017-04 goodwill impairment test :

Once again, companies have the choice to skip the qualitative assessment. Therefore, we're going to head straight into the quantitative impairment test. Since the reporting data is the same between our two scenarios, the Bright Sunshine carrying value will still be $ 2,100,000. Likewise, we again assume that the fair value is $ 2,005,000.

Now, Bright Sunshine no longer has to measure the fair value of each asset and liability to calculate the impairment charge. This eliminates Step Two from the current quantitative assessment, meaning we can directly compare the fair value of a reporting unit with its carrying value to arrive at the impairment charge:

Fair Value of Reporting Enitity = $ 2,005,000

Carrying value of bright Sunshine = $ (2,100,000)

Goodwill Impaired = $ 95,000

Journal Entry

Goodwill Impairment A/c Dr 95,000

To Goodwill A/c 95,000

(Being goodwill impaired)