Question

On January 1, 2018, P Company acquired the net assets of S Company for $1,600,000 cash. The fair value of S Co. identifiable net assets was $1,400,000 on this date. P Company decided to measure goodwill impairment using the present value of future cash flows to estimate the fair value of the reporting unit (S Co.). The information for these subsequent years is as follows: Carrying value of Present value S Co. Identifiable Year of Future Cash Flows Net Assets 2018 $1,300,000 $1,200,000 2019 $1,410,000 $1,210,000 * Identifiable net assets do not include goodwill. Fair Value S Co. Identifiable Net Assets $1,110,000 $1,200,000 Use the above information to answer the following:

1) After doing goodwill impairment test in year 2019, the carrying value including goodwill of S Co. was: *

a) $1,401,000

b) $1,403,000

c) $1,400,000

d) $1,402,000

2) After doing goodwill impairment test in year 2018, the result was: *

a) Impairment loss of $13,000

b) No Impariment loss

c) Impairment loss of $12,000

d) Impairment loss of $10,000

Answer 1

For 2018

The carrying amount of identifiable Net assets = $1,200,000

Carrying value of goodwill = $200,000

Total carrying value = $1,400,000

First we will compare this with present value of future Cashflows of 2018 l, which is $1,300,000

So total difference is $100,000

Out of this amount, some loss is relateing to net identifiable assets and the remaining to goodwill.

Impairment on identifiable assets = Carrying amount of identifiable assets - Fair value

= $1,200,000 - $1,110,000

= $90,000

The remaining $10,000 ($100,000 - $90,000) is related to goodwill impairment. Leaving a goodwill balance of $190,000.

For 2019

The total carying value of all assets = $1,210,000 + $190,000 = 1,400,000

Comparing this to present value of future Cashflows, which is $1,410,000. So no impairment of goodwill.

The goodwill carrying amount will be $190,000

So the total assets balance will be $1,400,000

Answer to Question 1 : Option c - $1,400,000

Answer to Question 2 : Option d - $10,000