Goodwill Bobby’s Donuts Donuts & Coffee opened its doors in 2018 on the corner of Geary and Masonic St. in San Francisco, CA. Originally, the owners Lindsey Kline and Carly Repko had planned on catering to the small businesses in the neighborhood and keeping the business a fun side business to their main day jobs. However, soon they found themselves competing with the major local players including the downtown Donuts Shop and other local bakeries in the area. As part of their success, on December 31, 2018 they decided to purchase an existing local donut shop “Bobby’s Donuts” to further positon themselves in the local market. After the acquisition, Bobby’s Donuts continued to operate as a separate company and met the conditions of being a separate reporting unit. The consideration paid on December 31, 2018 directly to the shareholders of Bobby’s Donuts in exchange for all shares was $50,000. The following accounting facts existed at the time of acquisition: Bobby's Donuts - Partial Balance Sheet Dec. 31, 2018, Image Attached During 2019, a variety of factors impacted Bobby’s Donuts’ future earnings potential and expected cash flows in a negative way. This included an increase in raw materials and labor costs. At the end of 2019, company management concluded that it is more likely than not that the fair value of Bobby’s Donuts is less than its book value (i.e. carrying amount). Specifically, on December 31, 2019, the book value of Bobby’s Donuts net assets were $45,000, including the goodwill computed at time of acquisition. The fair value of Bobby’s Donuts on December 31, 2019, was $35,000. Lindsey Kline is not too concerned about goodwill impairment because as she told Carly Repko: “I don’t know too much about US GAAP but hopefully we can just write up the impaired goodwill when business is back on track.” Questions 4. What specific journal entry should be made on December 31, 2019, to account for the impaired goodwill?
Donuts & Coffee opened its doors in 2018 on the corner of Geary and Masonic St. in San Francisco, CA. Originally, the owners Lindsey Kline and Carly Repko had planned on catering to the small businesses in the neighborhood and keeping the business a fun side business to their main day jobs. However, soon they found themselves competing with the major local players including the downtown Donuts Shop and other local bakeries in the area. As part of their success, on December 31, 2018 they decided to purchase an existing local donut shop “Bobby’s Donuts” to further positon themselves in the local market. After the acquisition, Bobby’s Donuts continued to operate as a separate company and met the conditions of being a separate reporting unit. The consideration paid on December 31, 2018 directly to the shareholders of Bobby’s Donuts in exchange for all shares was $50,000. The following accounting facts existed at the time of acquisition:
Bobby's Donuts - Partial Balance Sheet Dec. 31, 2018, Image Attached
During 2019, a variety of factors impacted Bobby’s Donuts’ future earnings potential and expected cash flows in a negative way. This included an increase in raw materials and labor costs. At the end of 2019, company management concluded that it is more likely than not that the fair value of Bobby’s Donuts is less than its book value (i.e. carrying amount). Specifically, on December 31, 2019, the book value of Bobby’s Donuts net assets were $45,000, including the goodwill computed at time of acquisition.
The fair value of Bobby’s Donuts on December 31, 2019, was $35,000. Lindsey Kline is not too concerned about goodwill impairment because as she told Carly Repko: “I don’t know too much about US GAAP but hopefully we can just write up the impaired goodwill when business is back on track.”
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4. What specific
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