Corona Ltd acquired on 1 July 2016 all the share capital of Lane Ltd for a consideration of $620,000. At the date of acquisition, the fair value of the identifiable net assets of Lane Ltd is $450,000. After the acquisition, the board of directors of Corona Ltd decided to impair goodwill arising from the acquisition by $35,000 for the financial year ended 30 June 2018, $20,000 for the year ended 30 June 2019, and an additional $56,000 for the year ended 30 June 2020. The consolidation adjustment to record goodwill impairment on 30 June 2020 is:

Question

BlackTom AI · Accepted Answer

Goodwill at acquisition = Consideration 620,000 − Fair value of net assets 450,000 = 170,000.

1. Relevant knowledge points and concepts
- Goodwill arising on consolidation is recognised as the excess of consideration over identifiable net assets.
- Impairment of goodwill reduces the carrying amount of goodwill (or increases an accumulated impairment account) and is generally recognised in profit or loss in the period the impairment occurs.
- Impairments that relate to prior reporting periods (i.e., not recognised in those years) must be adjusted against opening retained earnings (a prior period adjustment), whereas the current year’s impairment is charged to the current year’s profit or loss.

2. Step-by-step reasoning
- Compute initial goodwill: 620,000 − 450,000 = 170,000.
- Total cumulative impairment decided after acquisition = 35,000 (YE 30/6/2018) + 20,000 (YE 30/6/2019) + 56,000 (YE 30/6/2020) = 111,000.
- Split the cumulative impairment into prior years’ impairments and current year: prior years = 35,000 + 20,000 = 55,000; current year = 56,000.
- At 30 June 2020, the consolidation entry must: (a) charge the current year impairment to impairment loss (profit or loss), and (b) adjust retained earnings for the two prior years’ impairments (if those prior-year charges were not previously reflected in group retained earnings). The total credit reduces goodwill via an accumulated impairment account by the full cumulative amount (111,000).

3. Intermediate calculations shown
- Goodwill = 620,000 − 450,000 = 170,000
- Cumulative impairment = 35,000 + 20,000 + 56,000 = 111,000
- Prior years’ impairment = 35,000 + 20,000 = 55,000
- Current year impairment = 56,000

4. Why the correct answer is correct
- Debiting Retained earnings 55,000 corrects prior period retained earnings for impairments that relate to earlier years.
- Debiting Impairment loss 56,000 recognises the current year expense.
- Crediting Accumulated impairment 111,000 records the total reduction of goodwill (or increases the contra‑goodwill accumulated impairment account) by the cumulative amount.

5. Why other possible entries would be incorrect (brief)
- Charging the whole 111,000 to Impairment loss would incorrectly overstate the current year profit or loss and fail to correct prior period retained earnings.
- Charging the whole 111,000 to retained earnings would omit the current year expense from the income statement and misstate current year performance.

6. Conclusion
The correct consolidation adjustment is: Dr Retained earnings 55,000; Dr Impairment loss 56,000; Cr Accumulated impairment 111,000, which matches the provided answer.

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