Based upon your knowledge of the facts presented in the case and appropriate authoritative guidance, Mickelson has asked you to oversee the testing of goodwill impairment for ZD and Hope and to ultimately determine, based upon the information provided by Roberts, the valuation of goodwill and the related impairment loss, if any, for the Household Goods segment. Please provide any relevant calculations for the case below:

Background

AM Enterprises (AM), a private global conglomerate of consumer product manufacturers in the landscaping/gardening space, purchased 100 percent of the stock of two companies, ZD Corporation (ZD) and Hope Industries (Hope), in January 2015. This was a bold move for AM, as the acquisitions represented a new venture for the company and the entrance into a new segment in which it had no experience. As a result of the transactions, AM initially reported $3.2 million of goodwill on its consolidated balance sheet, $2 million relating to the acquisition of ZD and $1.2 million relating to Hope.

The New Segment

ZD produces and sells high-end household accessories in retail markets across the United States. The company's top-selling products are its premium lines of kitchen and bathroom cabinet hardware and light fixtures. ZD's products are primarily sold through large retailers and wholesalers in large metropolitan areas. In recent years, however, company management has made a focused effort on selling directly to consumers through the company website. Accordingly, ZD marketing personnel have developed strategic advertising approaches to direct customers to its commerce website. Management anticipates that this initiative will greatly improve product margins and, thus, it is expected that direct-to-consumer sales will surpass sales through retailers/wholesalers within the next five years.

Hope is a manufacturer of premium home dcor with an emphasis on quality decorative linens and unique wall decorations. The company mainly sells its products in company-owned retail stores located in upscale shopping districts in urban populations. However, a limited line of Hope products can be found at other select brick-and-mortar retailers. Additionally, the company generates a small amount of revenue via its website. Due to the nature of the company products, Hope management has faced several challenges in developing a greater online presence, yet these struggles have also hampered the expansion of its competitors. Ultimately, management has plans to develop brand awareness that will allow for brick-and-mortar expansion into more suburban areas.

Upon the purchase of ZD and Hope, AM formally established a new segment, Household Goods, for financial reporting purposes. The segment is headed by an executive team, which provides oversight of the management teams at both companies. AM's corporate controller, Tracy Roberts, was promoted to Vice President of Finance?Household Goods following the merger.

From 2015 to 2018, the strategic acquisitions proved to be wise investments, as both ZD and Hope posted significant growth and continued to produce unique products each year. In 2019, however, the companies moved in opposite directions. ZD continued its impressive growth. Hope, on the other hand, encountered significant competition and regulatory setbacks, leading to diminished profitability and derailing the company's strong start under AM's control. However, Hope did benefit from some strategic land acquisitions in prior years that have appreciated considerably in value.

Goodwill

Prior to the acquisitions, in response to changes in generally accepted accounting principles in the United States (i.e., U.S. GAAP) and in the interest of effective portfolio management, the company developed a policy of subjecting each reporting unit to formal quantitative impairment tests of goodwill every five years, with the first such test to take place for the fiscal year 2019 financial statements. Due to the success of ZD and Hope each year and in comparison to competitors prior to 2019, AM financial reporting personnel concluded, year after year, that a formal quantitative goodwill impairment test was unnecessary.

However, pursuant to the new policy, the company made preparations toward the end of 2019 to test all of its reporting units. In conjunction with these tests, Roberts indicated that multiple fixed asset groupings within Household Goods experienced significant declines in market value, and thus the segment personnel would be testing all fixed asset groupings for impairment. AM hired Dynamic Equity, a large consulting firm specializing in corporate valuation, to conduct appraisals that are necessary for the goodwill impairment testing process. In addition, Morgan Mickelson, AM's Director of Financial Reporting, requested financial information from the accounting records of ZD and Hope from Roberts, including relevant fair value information regarding both companies' assets and liabilities. That information, in conjunction with Dynamic's appraisal reports, will be used in goodwill impairment testing. Dynamic's reports highlighted December 31, 2019 fair values in the amounts of $11,339,000 and $14,070,000 for ZD and Hope, respectively.

At the time Mickelson made the request, Roberts was in the final stages of overseeing impairment tests of the segment's fixed assets, finalizing the valuation of inventory, and reviewing the impact of interest rate changes on the fair value of the company's bond obligations. Essentially, Roberts had compiled all of the necessary information for the consideration of these areas, and in the coming weeks, planned to run a final analysis to determine their impact on the financial statements. Roberts was confident that all of the other assets and liabilities were reported at appropriate amounts that approximated fair values. The preliminary 2019 Balance Sheet Summary for each company provided by Roberts is presented inAppendix A.

In addition, Roberts also provided relevant information related to the ongoing impairment testing of property, plant, and equipment, valuation of inventory, and consideration of bonds payable:

• Property, Plant, & Equipment, net, is reported at historical cost less accumulated depreciation (i.e., $15,000,000 for ZD) on the preliminary 2019 Balance Sheet Summary. The tables inAppendix Bcontain information Roberts has compiled for fixed asset impairment testing.
• Current Assets on the preliminary 2019 Balance Sheet Summary includes inventory reported with the last-in-first-out (LIFO) approach, using the dollar-value LIFO method applied to a single inventory cost pool. Relevant information for these cost pools compiled by Roberts for the analysis of inventory valuation is presented inAppendix C.
• ZD's Bonds Payable consists of a single issuance of 8,000 bonds, each with a face value of $1,000 and a maturity date of 12/31/2024. The bonds have a coupon rate of 6 percent (payable annually) and were issued at face value. At 12/31/19, the prevailing market rate was 5 percent. Hope's Bonds Payable includes a single issuance of 6,200 bonds, each with a face value of $1,000 and a maturity date of 12/31/2023. The bonds have a coupon rate of 4 percent (payable annually) and were issued at face value. At 12/31/19, the prevailing market rate was 5 percent.

Panel A: ZD Corporation Panel B: Hope Industries APPENDIX A Preliminary Balance Sheet Summaries 2D Corporation Balance Sheet Summary December 31, 2019 Assets Current Assets Property, Plant, 8:. Equipment, net Total Assets Liabilities Current Liabilities Bonds Payable (maturity date123112024) Total Liabilities Stockholders' Equity Common Stock/Additional Paid-lnCapital Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity Hope Industries Balance Sheet Summary December 31, 2019 Assets Current Assets Property, Plant, & Equipment, net Total Assets Liabilities Current Liabilities Bonds Payable (maturity date12/31/2023) Total Liabilities Stockholders' Equity Common Stock/Additional Paid-In-Capital Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity 25,000,000 15,000,000 40,000,000 2 1,000,000 8,000,000 29,000,000 8,000,000 3,000,000 1 1,000,000 40,000,000 16,500,000 1 1,500,000 28,000,000 13,800,000 6,200,000 20,000,000 10,000,000 (2,000,000) 8,000,000 28,000,000 Panel A: ZD Corporation APPENDIX B Property, Plant, and Equipment Information Asset Book Fair Market Sum of Undiscounted Groupingll Value Value Future Cash Flows 1 1,250,000 800,000 1,500,000 2 3,400,000 3,600,000 4,200,000 3 960,000 850,000 900,000 4 1,080,000 900,000 1,200,000 5 3,800,000 3,850,000 3,900,000 6 1,600,000 1,750,000 2,000,000 7 440,000 300,000 400,000 8 820,000 600,000 1,000,000 9 750,000 860,000 980,000 10 900,000 1,075,000 1,200,000 15,000,000 14,585,000 17,280,000 a Groups based upon lowest level in which related cash ows are independent of other assets. Panel B: Hope Industries Asset Book Fair Market Sum of Undiscounted GroupingI1 Value Value Future Cash Flows 1 4,180,000 4,265,000 4,850,000 2 1,200,000 900,000 1,100,000 3 865,000 880,000 1,200,000 4 2,085,000 3,980,000 3,470,000 5 1,430,000 2,480,000 2,200,000 6 295,000 1,895,000 2,800,000 7 1,445,000 2,000,000 2,150,000 11,500,000 16,400,000 17,770,000 3 Groups based upon lowest level in which related cash ows are independent of other assets. APPENDIX C Inventory Information Panel A: ZD Corporation Net Net Realizable Dollar-Value Replacement Realizable Value Less Normal LIFO Cost Cost Value Prot Margin 5,000,000 4,100,000 6,000,000 4,800,000 Panel B: Hope Industries Net Net Realizable Dollar-Value Replacement Realizable Value Less Normal LIFO Cost Cost Value Prot Margin 3,700,000 3 ,85 0,000 4,600,000 3,300,000