Question

please use fasb codification citations in your andwer

C1-4 Determination of Goodwill Impairment LO 1-5 Research Plush Corporation purchased 100 percent of Common Corporation's common stock on January 1, 20X3, and paid $450,000. The fair value of Common's identifiable net assets at that date was $430,000. By the end of 20X5, the fair value of Common, which Plush considers to be a reporting unit, had increased to $485,000; however, Plush's external auditor made a passing comment to the company's chief accountant that Plush might need to recognize impairment of goodwill on one or more of its investments. Required Prepare a memo to Plush's chief accountant indicating the tests used in determining whether goodwill has been impaired. Include in your discussion one or more possible conditions under which Plush might be required to recognize impairment of goodwill on its investment in Common Corporation. In preparing your memo, review the current accounting literature, including authoritative pronouncements of the FASB and other appropriate bodies. Support your discussion with citations and quotations from the applicable literature

Answer 1

C1-5 Determination of Goodwill Impairment MEMO TO: Chief Accountant Plush Corporation From: CPA Re: Determining Impairment of Goodwill Once goodwill is recorded in a business combination, it must be accounted for in accordance with FASB Statement No. 142. Goodwil is carried forward at the original amount without amortization, unless it becomes impaired. The amount determined to be goodwill in a business combination must be assigned to the reporting units of the acquiring entity that are expected to benefit from the synergies of the combination. [FASB 142, Par. 34) This means the total amount assigned to goodwill may be divided among a number of reporting units. Goodwill assigned to each reporting unit must be tested for impairment annually and between the annual tests in the event circumstances arise that would lead to a possible decrease in the fair value of the reporting unit below its carrying amount (FASB 142 Par. 28). As long as the fair value of the reporting unit is greater than its carrying value, goodwill is not considered to be impaired. If the fair value is less than the carrying value, a second test must be performed. An impairment loss must be reported if the carrying amount of reporting unit goodwil exceeds the implied fair value of that goodwill. (FASB 142. Par. 20 At the date of acquisition, Plush Corporation recognized goodwill of $20,000 ($450,000 $430,000) and assigned it to a single reporting unit. Even though the fair value of the reporting unit increased to $485,000 at December 31, 20X5, Plush Corporation must test for impairment of goodwill if the carrying value of Plush's investment in the reporting unit is above that amount. That would be the case if the carrying value is $500,000. In the second test, the fair value of the reporting unit's net assets, excluding goodwill, is deducted from the fair value of the reporting unit ($485,000) to determine the amount of implied goodwill at that date. If the fair value of the net assets is less than $465,000, the amount of implied goodwil is more than $20,000 and no impairment of goodwill is assumed to have occurred. On the other hand, if the fair value of the net assets is greater than $465,000, the amount of implied goodwill is less than $20,000 and an impairment of goodwill must be recorded. With the information provided in the case, we do not know if there has been an impairment of the goodwill involved in the purchase of Common Corporation; however, Plush must folow the procedures outlined above in testing for impairment at December 31, 20X5.