Determination of Goodwill Impairment
Plush Corporation purchased 100 percent of Common Corporation’s common stock on January 1, 20X3, and paid $450,000. The fair value of Common’s identifiable net assets at that date was $430,000. By the end of 20X5, the fair value of Common, which Plush considers to be a reporting unit, had increased to $485,000; however, Plush’s external auditor made a passing comment to the company’s chief accountant that Plush might need to recognize impairment of goodwill on one or more of its investments.
Required
Prepare a memo to Plush’s chief accountant indicating the tests used in determining whether goodwill has been impaired. Include in your discussion one or more possible conditions under which Plush might be required to recognize impairment of goodwill on its investment in Common Corporation. In preparing your memo, review the current accounting literature, including authoritative pronouncements of the FASB and other appropriate bodies. Support your discussion with citations and quotations from the applicable literature.
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