10.Goodwill results from the purchase of one firm by another for a price that is
ID: 2426213 • Letter: 1
Question
10.Goodwill results from the purchase of one firm by another for a price that is greater than the fair value of the net assets acquired. On January 1, 2014, XYZ Co. purchased Red MNO Co. for $1,500,000 when the net assets were valued at $1,200,000. Goodwill will be tested annually for impairment. Assume that after the first year there was an impairment of $25,000. Required: (a.) Compute the value of goodwill to be recorded on the books of Blue Grass Company upon the purchase of the business. (b.) What is impairment and how is the first year’s impairment recorded in the books?
Explanation / Answer
Solution: a)
If the business is pruchased for more than the value of its net assets, the difference is stated as goodwill.
In the given question, the met assets were valued at $1,200,000 and purchase consideration paid was $1,500,000.
Therefore, Value of goodwill = $1,500,000 - $1,200,000 = $300,000
b) Impairment IS recorded when an asset's carrying amount is not recoverable. An asset is not recoverable if the carrying amount exceeds the expected future cash flows to be delivered from the asset on an undiscounted basis.
Calcution of Impairment Loss - The carrying amount of the long lived asset or asset group is compared with the fair value of the asset. The impairment loss is measured as the amount by which the asset's carrying amount exceeds its fair value.
Impairment Loss = Carriying amount - Recoverable amount
Recoverable amount is higher of net selling price and value in use.,
Net selling Price means Estimated selling price less estimated selling expense
Value in use means the present value of expected future cash flows from the use of asset and its terminal value. Cash flow are both inflow and outflow. These are discounted using pre-tax rate.
In the given question, since no information is given about the net selling price or value in use, we assume that the fair value of goodwill which is the recoverable amount must have been fallen by $25,000 due to fall in the fair value of net assets value.
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