Question

On December 31, it was estimated that goodwill of $51,500 was impaired. In addition, a patent with an estimated useful economic life of 12 years was acquired for $115,200 on April 1.
a. Journalize the adjusting entry on December 31 for the impaired goodwill
b. Journalize the adjusting entry on December 31 for the amortization of the paten

Answer 1

Answer:

a. The journal entries for the impaired goodwill as at Dec 31 would be:

Debit Impairment expense/charge $51,500

Credit Goodwill/Allowance for impairment $51,500

(To recognize impairment expense on goodwill)

b. Journal entries for the amortization of the patent as at Dec 31 would be:

Debit Amortization expense $9,600 [$115,200/12]

Credit Accumulated amortization $9,600

(To recognize amortization expense on patent)

Explanation:

A goodwill is impaired when its carrying value exceeds its fair value. The impairment test is carried out annually and the difference by which the carrying value of the goodwill exceeds the fair value is charged to the profit or loss account as impairment expense. The impairment reduces the goodwill to its fair value.

Goodwill belongs to a class of intangible asset and it arises essentially as a result of business combination. A business combination occurs when a company acquires another company.