Question

Use the information provided in IFRS12-8. Assume that the recoverable amount of the division is estimated to be \(750,000. Prepare Waters’ journal entry, if necessary, to record an impairment of the goodwill.

Waters Corporation purchased Johnson Company 3 years ago and at that time recorded goodwill of \)400,000. The Johnson Division’s 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’ journal entry, if necessary, to record impairment of the goodwill.

Short answer

Loss on Impairment = $50,000

Step-by-step solution

Meaning of impairment of goodwill 

It is a reduction in earnings that corporations report on their income statement after discovering that an acquired asset linked with goodwill has not performed as planned financially at the time of purchase.

Preparing journal entries 

Date	Particulars	Debit ($)	Credit ($)
	Loss on Impairment	50,000
	Goodwill ($800,000 – $750,000)		50,000

An impairment has occurred because the reporting unit's recoverable amount ($750,000) is less than its carrying value ($800,000). The difference between the recoverable and carrying amounts is the loss amount.