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Chapter 12: Q12-8IFRS (page 656)

Waters Corporation purchased Johnson Company 3 years ago and at that time recorded goodwill of \(400,000. The Johnson Division鈥檚 net assets, including the goodwill, have a carrying amount of \)800,000. The recoverable amount of the division is estimated to be $1,000,000. Prepare Waters鈥� journal entry, if necessary, to record an impairment of the goodwill.

Short Answer

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Step by step solution

01

Meaning of Goodwill 

Goodwill is the fraction of the purchase price that is greater than the net fair value of all the assets and liabilities sold. When a firm buys a new business, it obtains goodwill, which is an intangible asset (one that isn't tangible but has a long-term worth).

02

Preparing journals entry 

Goodwill is not deemed to be damaged since the recoverable amount of the division exceeds the carrying amount of the assets. There is no need to register any entry.

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Most popular questions from this chapter

Hendricks Corporation purchased trading investment bonds for \(50,000 at par. On December 31, Hendricks received an annual interest of \)2,000, and the fair value of the bonds was $47,400. Prepare Hendricks鈥� journal entries for (a) the purchase of the investment, (b) the interest received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.)

Fairbanks Corporation purchased 400 shares of Sherman Inc. common stock for \(13,200 (Fairbanks does not have significant influence). During the year, Sherman paid a cash dividend of \)3.25 per share. At year-end, Sherman stock was selling for $34.50 per share. Prepare Fairbanks鈥� journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustmentaccount.)

Recently, a group of university students decided to incorporate for the purposes of selling a process to recycle the waste product from manufacturing cheese. Some of the initial costs involved were legal fees and office expenses incurred in starting the business, state incorporation fees, and stamp taxes. One student wishes to charge these costs against revenue in the current period. Another wishes to defer these costs and amortize them in the future. Which student is correct?

: As a new intern for the local branch office of a national brokerage firm, you are excited to get an assignment that allows you to use your accounting expertise. Your supervisor provides you with the spreadsheet below, which contains data for the most recent quarter for three companies that the firm has been recommending to its clients as 鈥渂uys.鈥� Each of the companies鈥� returns on assets has outperformed their industry cohorts in the past. But, given recent challenges in their markets, there is concern that the companies may experience operating challenges and lower earnings. (All numbers in millions, except return on assets.)

A

B

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Fair Value of Company

Book Value (Net Assets)

Carrying Value of Goodwill

Return on Assets

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E* Trade Financial

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Instructions

  1. The fair value for each of these companies is lower than the corresponding book value. What implications does this have for each company鈥檚 future prospects?
  2. To date, none of these companies has recorded goodwill impairments. Your supervisor suspects that they will need to record impairments in the near future, but he is unsure about the goodwill impairment rules. Is it likely that these companies will recognize impairments? Explain.
  3. Estimate the amount of goodwill impairment for each company and prepare the journal entry to record the impairment. For each company, you may assume that the book value less the carrying value of the goodwill approximates the fair value of the company鈥檚 net assets.
  4. Discuss the effects of your entries in part (c) on your evaluation of these companies based on the return on assets ratio.

Question: R. Wilson Corporation commenced operations in early 2017. The corporation incurred \(60,000 of costs such as fees to underwriters, legal fees, state fees, and promotional expenditures during its formation. Prepare journal entries to record the \)60,000 expenditure and 2017 amortization, if any.
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