On July 1, 2017, Ashtabula Corp. purchases 100% of Blasdell Company for $3.575 million. At the time of acquisition, the fair market value of Blasdell's tangible net assets (excluding goodwill) is $2.99 million. Ashtabula ascribes the excess of $585,000 to goodwill. During the first half of the year, the fair value of Blasdell declines to $3.185 million and the fair value of Blasdell's tangible net assets is estimated at $2.795 million as of December 31, 2017. This decline is deemed permanent.
What impairment charge, if any, should Ashtabula report at December 31, 2017?

Question

Quizplus · Accepted Answer

The impairment charge is calculated as the difference between the carrying amount of the goodwill and the fair value of the goodwill. Initially, the goodwill was $585,000. The fair value of the company declined to $3.185 million, and the tangible net assets were valued at $2.795 million, leaving a goodwill of $390,000 ($3.185 million - $2.795 million). Therefore, the impairment charge is the difference between the initial goodwill and the remaining goodwill, which is $195,000 ($585,000 - $390,000).