35. Stanvid Company provided the following information: Fair value of the report

Question

35. Stanvid Company provided the following information: Fair value of the reporting unit, including goodwill        1,400,000 Fair value of the net assets, excluding goodwill        1,200,000 Book value of net assets, excluding goodwill        1,000,000 Add: Carrying value of goodwill            600,000 Carrying value of the reporting unit, including goodwill        1,600,000 The qualitative assessment of goodwill is completed and it is more likely than not that goodwill is impaired. Perform the quantitative analysis to determine the required journal entry to record the goodwill impairment loss. A. Quantitative assessment indicates no impairment loss exists. No journal entry required B. Dr. Impairment Loss on Goodwill 400,000      Cr. Goodwill 400,000 C. Dr. Impairment Loss on Goodwill 200,000      Cr. Goodwill 200,000 D. Dr. Impairment Loss on Goodwill 100,000      Cr. Goodwill 100,000 35. Stanvid Company provided the following information: Fair value of the reporting unit, including goodwill        1,400,000 Fair value of the net assets, excluding goodwill        1,200,000 Book value of net assets, excluding goodwill        1,000,000 Add: Carrying value of goodwill            600,000 Carrying value of the reporting unit, including goodwill        1,600,000 The qualitative assessment of goodwill is completed and it is more likely than not that goodwill is impaired. Perform the quantitative analysis to determine the required journal entry to record the goodwill impairment loss. A. Quantitative assessment indicates no impairment loss exists. No journal entry required B. Dr. Impairment Loss on Goodwill 400,000      Cr. Goodwill 400,000 C. Dr. Impairment Loss on Goodwill 200,000      Cr. Goodwill 200,000 D. Dr. Impairment Loss on Goodwill 100,000      Cr. Goodwill 100,000

Explanation / Answer

Because it is more likely than not that Stanvid's goodwill is impaired, we will perform the quantitative test. So we will perform the quantitative test.

Two-step Impairment test. (Under U.S. GAAP)

Step 1) Recoverability test - To judge whether to impair or not.

Compare Carrying value of the reporting unit (including goodwill) with the Fair value of the reporting unit (including goodwill).

1,600,000 - 1,400,000 = 200,000

Carrying value of the reporting unit (including goodwill) is greater than the Fair value of the reporting unit (including goodwill) therefore, impairment is required.

Step 2) Impairment Loss calculation

Book Value of Goodwill - Implied Fair Value of goodwill

Book Value of Goodwill is given as $600,000

Implied Fair Value of goodwill = Fair value of the reporting unit (including goodwill) - Fair Value of the reporting unit (excluding goodwill)

Implied Fair value of goodwill = 1,400,000 - 1,200,000 = 200,000

Therefore,

Impairment Loss = 600,000 - 200,000 = 400,000

Answer is Option B.

Note - The Rule of impairment is different under IFRS. Under IFRS, goodwill Impairment is a single step process.

Impairment Loss = Carrying value of the reporting unit (including goodwill) - Fair value of the reporting unit (including goodwill).

Impairment loss = $200,000

Then, the answer should be option C.

As the question doesn't specify IFRS or U.S. GAAP so, I provided the solution according to both.

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