Stanvid Company provided the following information:

Fair value of the reporting unit, including goodwill
$1,400,000
Fair value of the net assets, excluding goodwill
$1,200,000
Book value of net assets, excluding goodwill
$1,000,000
Add: Carrying value of goodwill
600,000
Carrying value of the reporting unit, including goodwill
$1,600,000

The qualitative assessment of goodwill is completed and it is more likely than not that goodwill is impaired. Describe the process for determining if Stanvid needs to record a goodwill impairment loss and prepare any required journal entries.

What will be an ideal response?

Answer: Because it is more likely than not that Stanvid's goodwill is impaired, we will perform the quantitative test. So we will perform the quantitative test.

Two-Step Impairment Test
Step 1: Assess Recoverability. We compare the fair value of the reporting unit (including goodwill) to the book value of the reporting unit (including goodwill) to assess recoverability. U.S. GAAP requires an impairment test because the $1,400,000 fair value of the reporting unit (including goodwill) is less than the $800 book value of the reporting unit (including goodwill). So, we must measure the impairment loss.
Step 2: Measure the Impairment Loss. The fair value of the net assets (excluding goodwill) is $600. The impairment loss is computed as follows:

Fair value of the reporting unit, including goodwill
$1,400,000
Fair value of the net assets, excluding goodwill
1,200,000
Implied fair value of goodwill
200,000
Less: Carrying value of goodwill
(600,000)
Impairment Loss
$(400,000)

Stanvid recognizes the impairment loss by making the following journal entry:
Impairment Loss on Goodwill
400,000

Goodwill

400,000