Answer:
The Simmons Group, Inc.
a. December 31, 20Y9, the book value of Goodwill before impairment = $5,572,875
b. Effects on the accounts of the December 31, 20Y9 adjustment for the goodwill impairment:
1. Impairment loss of $3,901,012 will be accounted for in the Income Statement for the year, thus reducing the reported profits by $3,901,012.
2. Goodwill be reduced to $1,671,863 in the balance sheet by deducting the impairment loss of $3,901,012 from the book value before the impairment.
Explanation:
a) Data and Calculations:
Jan. 1, 20Y3, Purchase price of NWS Insurance Co. = $37,152,500
Goodwill on acquisition = $5,572,875
December 31, 20Y9, the book value of Goodwill before impairment = $5,572,875
Impaired value - $1,671,863
Impairment loss = $3,901,012 ($5,572,875 - $1,671,863)
b) The Goodwill impairment shows that the carrying amount, $1,671,863, is less than the fair value of $5,572,875. Goodwill is an intangible asset which Simmons Group acquired from NWS Insurance on January 1, 20Y3. It is annually tested for impairment by comparing the fair value with the carrying value.
