Infinity Corporation acquired 80 percent of the common stock of an Egyptian company on January 1,20X8.The goodwill associated with this acquisition was $18,350.Exchange rates at various dates during 20X8 follow:
Goodwill suffered an impairment of 20 percent during the year.If the functional currency is the Egyptian Pound,how much goodwill impairment loss should be reported on Infinity's consolidated statement of income for 20X8?

Question

Quizplus · Accepted Answer

The goodwill impairment loss should be calculated in the functional currency, which is the Egyptian Pound in this case.

Step 1: Calculate the carrying value of goodwill at the end of the year.
Since there was an impairment of 20%, the carrying value of goodwill at the end of the year would be:
$18,350 - ($18,350 x 20%) = $14,680

Step 2: Translate the carrying value of goodwill at the end of the year to the parent company's reporting currency (assumed to be U.S. dollars) using the exchange rate at the end of the year.
$14,680 ÷ 5.75 (exchange rate at the end of the year) = $2,548.70

Step 3: Translate the carrying value of goodwill at the acquisition date to the parent company's reporting currency (assumed to be U.S. dollars) using the exchange rate at the acquisition date.
$18,350 ÷ 5.50 (exchange rate at the acquisition date) = $3,336.36

Step 4: Calculate the goodwill impairment loss in the parent company's reporting currency.
$3,336.36 - $2,548.70 = $787.66

Step 5: Translate the goodwill impairment loss back to the functional currency (Egyptian Pound) using the exchange rate at the end of the year.
$787.66 x 5.75 = EGP 4,523.08

Therefore, the goodwill impairment loss to be reported on Infinity's consolidated statement of income for 20X8 is EGP 3,680, which is the closest to option C.

Infinity Corporation Acquired 80 Percent of the Common Stock of an Egyptian