eBay Inc. acquired Skype in 2005 for $2.6 billion. Of this total purchase price,

Question

eBay Inc. acquired Skype in 2005 for $2.6 billion. Of this total purchase price, $2.3 billion was recorded as goodwill on the balance sheet. In its 2007 10-K, eBay noted in its footnotes: 4. "We conducted our annual impairment test of goodwill in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." As a result of this test, we concluded that the carrying amount of our communications reporting unit exceeded its fair value and recorded an impairment loss of approximately $1.4 billion during the year ended December 31, 2007. The impairment resulted from an updated long-term financial outlook for the Sitype business developed as part of our strategic planning cycle conducted annually." What journal entry did eBay record related to goodwill in 2007? What effect does it have on net income and total assets? (Assume there is no tax in your answer) Account Title Debit Credit

Explanation / Answer

Account Title Debit Credit Loss on impairment $ 1,400,000,000 Goodwill $ 1,400,000,000 The loss on impairment is recognized on the income statement and it reduces the period income, and assets is also reduced to that extent and new carrying value is recognized for the goodwill (2.3B - 1.4 B) = 0.9billion.

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