Goodwill Impairment. The Brigatti Company pays $1,560,000 to acquire 100% of the common stock of Cornish Incorporated. It assumes that Cornishs plant assets (such as the factory building and land) are undervalued by $40,000. The historical cost of the net assets acquired, excluding goodwill, is equal to $1,500,000. Cornish will be held as a division of Brigatti. The following information is available one year after the acquisition of the subsidiary company (i.e., the reporting unit):

DESCRIPTION DEBIT CREDIT

CASH $200,000

INVENTORY $300,000

PROPERTY,PLANT,EQUIP,NET $1,500,000

GOODWILL $20,000

CURRENT LIABILITIES $400,000

COMMON STOCK NO PAR $340,000

RETAINED EARNING $1,280,000

TOTAL $2,020,000 $2,020,000

Brigatti estimated the fair (appraisal) value of the divisions net assets (excluding goodwill) at $1,605,000 one year after the date of acquisition.

Required

Compute goodwill recorded on the date of acquisition.

Determine if goodwill is impaired assuming that the fair value of the Cornish Division with goodwill is equal to $2,000,000 one year after acquisition. Provide the impairment journal entry, if needed.

Determine if goodwill is impaired assuming that the fair value of the Cornish Division with goodwill is equal to $1,608,000 one year after acquisition. Prepare the impairment journal entry, if needed.

Computation of goodwill on the date of acquisition:

Account	Amount
Acquisition cost (total consideration transferred)
Book value of net assets acquired
Excess cost over book value
Revaluation of plant assets
Goodwill

Alternatively, goodwill could be computed as follows:

Account	Amount
Purchase Price (Cost or Total Consideration Transferred)
Fair Value (Appraisal values) of the Net Assets Acquired (Book value + net asset write ups = )
Unidentified Excess is Allocated to Goodwill (Excess Purchase Cost Over the Fair Market Value of Net Assets Acquired)

b. Perform the two-step impairment test

Step 1: Compare the fair value of the reporting unit to its book value:

Fair Value of the Reporting Unit, including goodwill
Book value of the net assets, including goodwill (i.e., the stockholders equity of the reporting unit = Common stock + retained earnings =) = Assets liabilities =)
There is no impairment test required because the fair value of the reporting unit exceeds the book value of the reporting unit. Thus, there is no need to perform Step 2.

c. Perform the two-step impairment test

Step 1: Compare the fair value of the reporting unit to its book value:

Fair Value of the Reporting Unit, including goodwill
Book Value of the Reporting Unit, including goodwill (see above)

The fair value of the reporting unit is less than the book value of the reporting unit. So, go to Step 2.

Step 2: Compare the implied fair value of goodwill to its carrying value.

An impairment test is required because the fair value of the reporting unit is less than the book value of the reporting unit.
Fair Value of the Reporting Unit, including goodwill
Less: Fair Value of the Net Assets (without goodwill)
Implied Fair Value of Goodwill
Less: Book Value of Goodwill
Goodwill Impairment Loss

Account	Date of Impairment
Impairment Loss on Goodwill
Goodwill