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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 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:

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

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