Question: (Goodwill Impairment) Presented below is net asset information related to the Carlos Division of Santana, Inc.

CARLOS DIVISION NET ASSETS AS OF DECEMBER 31, 2017 (IN MILLIONS)
Cash	\( 50
Accounts receivable	200
Property, plant, and equipment (net)	2,600
Goodwill	200
Less: Notes payable	(2,700)
Net assets	\) 350

The purpose of the Carlos Division is to develop a nuclear-powered aircraft. If successful, traveling delays associated with refueling could be substantially reduced. Many other benefits would also occur. To date, management has not had much success and is deciding whether a write-down at this time is appropriate. Management estimated its future net cash flows from the project to be \(400 million. Management has also received an offer to purchase the division for \)335 million. All identifiable assets’ and liabilities’ book and fair value amounts are the same.

Instructions

a. Prepare the journal entry (if any) to record the impairment at December 31, 2017.

b. At December 31, 2018, it is estimated that the division’s fair value increased to $345 million. Prepare the journal entry (if any) to record this increase in fair value.

Step by step solution

01

Meaning of Goodwill

Goodwill is the fraction of the purchase price that is greater than the net fair valueof 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 journal entry to record the impairment at December 31, 2017 (a) 

Date	Particular	Debit ($)	Credit ($)
Dec. 31, 2017	Loss on Impairment	15,000,000
	Goodwill		15,000,000

The reporting unit's fair value ($335 million) is less than its carrying value ($350 million). As a result, there has been a deficiency. To establish the amount of impairment, we must first determine the implied goodwill. The amount of the impairment to record is then calculated by comparing the inferred fair value to the carrying value of the goodwill.

Working notes:

Calculating the amount of loss on impairment

Fair value of the division	$335,000,000
Carrying amount of division, net of goodwill	150,000,000
Implied value of goodwill	185,000,000
Carrying value of goodwill	(200,000,000)
Loss on impairment	$ 15,000,000

03

Explaining the journal entry to record this increase in fair value.

There is no need to register any entry. After a goodwill impairment loss is reported, the goodwill's new accounting premise is the goodwill's balanced carrying amount. FASB ASC 350-30-35 prohibits further inversion of already reported impairment losses.

Note: All other long-lived assets should be examined and adjusted for potential impairments before undertaking the goodwill impairment test.

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