Question
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 Limiteds 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:
- Prepare the journal entry to account for any impairment of goodwill. (9 marks)
- What are possible arguments for and against the prohibition of recognition of internally generated goodwill? (2 marks)
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