ABC Inc. purchased Catching Company on June 1, 2015 for $20,000,000 and recorded
ID: 2714480 • Letter: A
Question
ABC Inc. purchased Catching Company on June 1, 2015 for $20,000,000 and recorded goodwill of $2,000,000 in connection with the purchase. At December 31, 2015, it was determined that the fair value of the Catching Division was $17,000,000. The Catching Division’s book value of net assets (including goodwill) was $17,500,000; the fair value of Catching’s net assets (excluding goodwill) was $16,200,000. The amount of impairment loss of goodwill to be recorded on December 31, 2015 should be:
$0.
$600,000.
$1,000,000.
$1,200,000.
Explanation / Answer
ABC Inc. compares Catching Divsions's $17,000,000 fair value to its $17,500,000 book value. Because the fair value is less than the book value, an impairment loss needs to be recognized.
At December 2015,
Fair value of Catching Division = $17,000,000
Fair value of Catching Division's Net assets (excluding goodwill) = $16,200,000
Implied value of Goodwill = Fair value of Catching Division - Fair value of Catching Division's Net assets = $17,000,000 - $16,200,000 = $800,000
Carrying value of Goodwill (given) = $2,000,000
Impairment loss = Carrying value of Goodwill - Implied value of Goodwill = $2,000,000 - $800,000 = $1,200,000
The amount of impairment loss of goodwill to be recorded on December 31, 2015 should be $1,200,000.