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Charles Limited acquired Carlos Limited on 1 July 20X8 for cash of $3,800,000. At that date, Carlos Limiteds net identifiable assets had a fair value

Charles Limited acquired Carlos Limited on 1 July 20X8 for cash of $3,800,000. At that date, Carlos Limited’s net identifiable assets had a fair value of $3,000,000. The fair value of the net identifiable assets of Carlos Limited are determined as follows:

Inventory $500,000

Plant and Equipment $1,000,000

Land $2,000,000

$3,500,000

Less: Bank Loan $500,000

Net Assets $3,000,000

At the end of the reporting period of 30 June 20X9, the management of Charles Limited determines that the recoverable amount of the cash-generating unit, which is considered to be Carlos Limited, totals $2,300,000. The carrying amount of the net identifiable assets of Carlos Limited, which excludes goodwill, has not changed since acquisition and is $3,000,000.

Required:

  1. Prepare the journal entry to account for any impairment of goodwill. 
  2. What are possible arguments for and against the prohibition of recognition of internally generated goodwill?

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