Kent Company Acquires Devon Company: Impairment Loss Calculation

Kent Company Acquires Devon Company

Kent Company acquired Devon Company on January 1, 2016 for $3,600,000 and recorded goodwill of $400,000 as a result of that purchase. At December 31, 2016, Kent estimated that Devon had a fair value of $3,000,000. The net identifiable assets of the Devon (excluding goodwill) had a book value of $2,700,000 at that time.

Question:

What amount of loss on impairment of goodwill should Kent record in 2016?

Answer:

$100,000 loss

Explanation:

FV of Devon $3,000,000

Less Net Identifiable Assets (excluding goodwill) $2,700,000

Implied Goodwill $300,000

Goodwill per books ($400,000)

Loss to be recognized $100,000

Therefore the amount of loss on impairment of goodwill should Kent record in 2016 is $100,000

Final answer:

Kent Company must recognize an impairment loss of $100,000 because the fair value of Devon Company ($3,000,000) is less than the carrying amount ($3,100,000) which includes the goodwill.

Explanation:

In assessing the impairment of goodwill, Kent Company needs to compare the carrying value of Devon's net assets, including goodwill, to the fair value of Devon. The carrying value is the original purchase price minus the book value of identifiable assets, which is:

• Acquisition cost of Devon Company: $3,600,000
• Minus Book value of net identifiable assets: $2,700,000
• Equals Goodwill: $400,000
• Carrying amount (book value of net identifiable assets + goodwill): $3,100,000

The fair value of Devon is given as $3,000,000, which is less than the carrying amount of $3,100,000. Thus, the firm needs to recognize an impairment loss for goodwill:

• Carrying amount (including goodwill): $3,100,000
• Minus Fair value of Devon: $3,000,000
• Equals Impairment loss: $100,000

Therefore, Kent Company should record an impairment loss of $100,000 for the goodwill on December 31, 2016.