Goodwill project: Bobbys Donuts Case facts Donuts & Coffee opened its doors in 2018 on the corner of Geary and Masonic St. in San Francisco, CA. Originally, the owners Lindsey Kline and Carly Repko had planned on catering to the small businesses in the neighborhood and keeping the business a fun side business to their main day jobs. However, soon they found themselves to be competing with the major local donut shops in the area, particularly due to a high demand for their amazing chocolate-glazed donut. As part of their success, on December 31, 2021, they decided to purchase an existing local donut shop Bobbys Donuts to further position themselves in the local market. After the acquisition, Bobbys Donuts continued to operate as a separate company and met the conditions of being a separate reporting unit. The consideration paid on December 31, 2021, directly to the shareholders of Bobbys Donuts in exchange for all shares was $52,500. The following accounting facts existed at the time of acquisition:

Assets: Fair Value, Book Value

Cash: 44,000, 44,000

Accounts Rec: 13,000, 13,000

Allowance for Bad Debt: (1,000), (1,000)

Inventory: 9,000, 5,000

Land: 15,000, 12,000

Plant & Equipment: 29,000, 20,000

Liabilities Accounts Payable: 42,000, 42,000

Mortgage: 19,000, 19,000

Notes: 8,000, 7,000

During 2022, a variety of factors impacted Bobbys Donuts future earnings potential and expected cash flows in a negative way. This included an increase in raw materials and labor costs. At the end of 2022, company management concluded that it is more likely than not that the fair value of Bobbys Donuts is less than its book value (i.e., carrying amount). Specifically, on December 31, 2022, the book value of Bobbys Donuts net assets was $45,000, including the goodwill computed at time of acquisition. The fair value of Bobbys Donuts on December 31, 2022 was $32,000. Lindsey Kline is not too concerned about goodwill impairment because as she told Carly Repko: I dont know too much about US GAAP but hopefully we can just write up the impaired goodwill when business is back on track.

Requirements Requirement 1. Compute the amount of goodwill in the Bobbys Donuts acquisition on December 31, 2021. Please cite ASC 805-30-30-1 in your response.

Requirement 2. Explain why goodwill impairment testing for Bobbys Donuts should be considered on December 31, 2022. Please cite ASC 350-20-35-3A through ASC 350-20-35-3G in your response.

Requirement 3. Perform the goodwill impairment test for Bobbys Donuts on December 31, 2022, and include relevant calculations. Please cite ASC sections 350- 20-35-4 through 350-20-35-11 in your response.

Requirement 4. What specific journal entry should be made on December 31, 2022, to account for the impaired goodwill?

Requirement 5. What is the remaining goodwill (new accounting basis) after the impairment loss journal entry has been performed on December 31, 2022? Please see ASC 350-20-35-12.

Requirement 6. What is the maximum potential goodwill impairment loss that can be recorded in 2023 (if any)? Consider ASC 350-20-35-11 and ASC 350-20-35-12 in your response.

Requirement 7. Is Lindsey Kline correct about her assumption of US GAAP goodwill recovery? Cite the relevant sub-section in ASC 350 in your response. Project submission and formatting: - Please use Microsoft Word, Times New Roman (Font 12) double-spacing - Submit via the Blackboard link (ASC Project folder). - Deadline: Tuesday 18th @ 11:59pm (EDT).