Question

On July 31, 2017, Sunland Company paid $2,850,000 to acquire all of the common stock of Conchita Incorporated, which became a division of Sunland. Conchita reported the following balance sheet at the time of the acquisition. Current assets $750,000 Current liabilities $560,000 Noncurrent assets 2,550,000 Long-term liabilities 460,000 Total assets $3,300,000 Stockholders’ equity 2,280,000 Total liabilities and stockholders’ equity $3,300,000 It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was $2,500,000. Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31, 2017, Conchita reports the following balance sheet information. Current assets $460,000 Noncurrent assets (including goodwill recognized in purchase) 2,180,000 Current liabilities (620,000 ) Long-term liabilities (420,000 ) Net assets $1,600,000 It is determined that the fair value of the Conchita Division is $1,850,000. The recorded amount for Conchita’s net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value $100,000 above the carrying value.

Assume that fair value of the Conchita Division is $1,412,000 instead of $1,850,000. Determine the impairment loss, if any, to be recorded on December 31, 2017.

The impairment loss

Answer 1

First of all let's calculate the amount of goodwill to be recognized at time of acquisition :

Goodwill = Purchase price for acquisition - Fair value of identifiable net assets = 28,50,000$ - 25,00,000$ = 350,000$

Now let's calculate Impairment, if any, to be recorded when Fair value of assets as at December 31,2017 (6 months from July 31, 2017) is 18,50,000$.

Impairment loss = Carrying amount (Book value) - Fair value of assets = 16,00,000$ - 18,50,000$ = Nil

Since the amount of net assets recorded in books is already lower than the fair value, there's no need to record any impairment.

Now, for the main answer considering fair value of net assets as on December 31, 2017 to be 14,12,000$ instead of 18,50,000$ :

Impairment loss = 16,00,000$ - 14,12,000$ = 188,000$

Entry for Impairment loss :

S. No.	Particulars	Debit ($)	Credit ($)
1	Impairment Loss a/c ..Dr	1,88,000
	To Goodwill a/c		1,88,000

Since the entity has goodwill in its books, impairment loss will first be adjusted against the same.