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Goodwill Impairment

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From part 1, we are to consider DDC Distribution and HC Holding to be one reporting unit. When performing step one of the Goodwill Impairment Testing we will consider two separate reporting units. The first reporting unit is the business component Medical-Surgical. Step one involves comparing the carrying value (including goodwill) with the fair value of the reporting unit.

Carrying Value without Goodwill Carrying Value of Goodwill Total Carrying Value including Goodwill
$118,800,000 3,200,000 $122,000,000

Fair Value Difference Carrying Value including Goodwill
$125,000,000 FV > CV by $3,000,000 $122,000,000

When we compare this value with the Fair Value we see that the Fair Value is higher by $3,000,000. This means that Goodwill is not impaired and no further steps need to be taken.

Now to compare the second reporting unit, DDC Distribution and HC Holding that are aggregated. We must first find the total carrying value, including Goodwill, of the two components.

Value/Amount DDC Distribution HC Holdings Total
Carrying Value of Net Assets (w/o Goodwill) $231,700,000 $72,250,000 $303,950,000
Carrying Value of Goodwill $10,500,000 $2,150,000 $12,650,000
Total Carrying Value including Goodwill $242,200,000 $74,400,000 $316,600,000

Now we follow step one and compare the carry value to fair value.
Fair Value Difference Carrying Value including Goodwill
$236,000,000 + 75,000,000 = $311,000,000 FV < CV by $5,600,000 $316,600,000

The second reporting unit has a goodwill impairment that must be computed and recorded. We must follow step two in order to find the amount of the impairment.

To determine the implied fair value of goodwill we must calculate the fair value of the recognized net assets. The Assembled Workforce is NOT included because it is not identifiable (it is not separable or have contractual or legal documents attached).

Fair Value DDC Distribution HC Holdings Total
Tangible Net Assets $53,000,000 $24,350,000 $77,350,000
Recognized Intangibles 75,000,000 45,000,000 120,000,000
Unrecognized Intangibles:
Patent 75,000,000 0 75,000,000
Customer List 15,500,000 5,000,000 20,500,000
In-Process R&D 12,000,000 0 12,000,000
Computer Software 0 0 0
Totals $230,500,000 $74,350,000 $304,850,000

Fair value of the reporting unit $311,000,000
Less: Net Identifiable Assets (304,850,000)
Implied Value of Goodwill 6,150,000

Implied Fair Value of Goodwill Difference (Amount of Impairment) Carrying Amount of Goodwill
$6,150,000 $6,500,00 $12,650,000

Journal entries:

Allowance for impairment of goodwill $6,500,00

Goodwill $6,500,00

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