Question

Assume that the equity method Equity Investment account relating to a subsidiary has a reported balance of $2,950,000, including $150,000 of Goodwill. The fair value of the subsidiary is $2,750,000. The fair value of the subsidiary’s individually identifiable net assets is $2,500,000. The subsidiary has only one reporting unit, which is the same as the overall entity.
a. Should you perform a test for potential impairment of goodwill?
b. If so, do you conclude that goodwill is impaired?
c. Prepare the required journal entry ID where you find the goodwill asset to be impaired.

Answer 1

Answer:

a) Yes, because the Fair value of the Subsidiary is less than the Equity Investment value.

b) Yes there is an Asset impairment and any asset impairment is set off against goodwill first.

c) Debit Goodwill impairment $50,000 Credit Goodwill Asset $50,000.

Explanation:

b) Balance of Equity Investment = $2,950,000 - 150,000 goodwill

                                                     = $2,800,000

Fair Value of Subsidiary             = $2,750,000

Impairment                                   = $50,000

Reason why deduct goodwill from the Equity Balance of $2,950,000 is because goodwill can be separately shown on the balance sheet under non current assets, therefore when testing for impairment on asset it must be balance of equity (net of good will) versus fair value of subsidiary.