In 2022, Quasar Limited acquired all of the common stock of Penlight Laser for $124 million. The fair value of Penlight’s identifiable tangible and intangible assets totaled $205 million, and the fair value of liabilities assumed by Quasar was $95 million. Quasar performed a required goodwill impairment test at the end of its fiscal year ended December 31, 2024. Management has provided the following information:
Fair value of Penlight (reporting unit) $ 115 million
Fair value of Penlight’s net assets (excluding goodwill) 107 million
Book value of Penlight’s net assets (including goodwill) 125 million
Required:
Determine the amount of goodwill that resulted from the Penlight acquisition.
Determine the amount of goodwill impairment loss that Quasar should recognize at the end of 2024.
If an impairment loss is required, prepare the journal entry to record the loss.
To determine the amount of goodwill that resulted from the Penlight acquisition, we need to subtract the fair value of net identifiable assets from the total purchase price:
Goodwill = Purchase price - Fair value of net identifiable assets
Goodwill = $124 million - $205 million = -$81 million
The amount of goodwill is negative, indicating that the fair value of net identifiable assets acquired exceeds the purchase price, resulting in a bargain purchase gain rather than goodwill. Therefore, no goodwill resulted from the Penlight acquisition.
To determine the amount of goodwill impairment loss, we compare the fair value of the reporting unit (Penlight) to its carrying value, including goodwill. If the fair value is lower, an impairment loss is required.
Carrying value of the reporting unit = Book value of net assets (including goodwill) = $125 million
Fair value of the reporting unit = Fair value of net assets (excluding goodwill) = $107 million
Since the fair value of the reporting unit ($107 million) is lower than its carrying value ($125 million), goodwill is impaired.
Goodwill impairment loss = Carrying value of the reporting unit - Fair value of the reporting unit
Goodwill impairment loss = $125 million - $107 million = $18 million
The journal entry to record the goodwill impairment loss would be:
Impairment loss 18,000,000
Goodwill 18,000,000
This entry decreases the goodwill by the impairment loss amount.