Case facts Donuts & Coffee opened its doors in 2018 on the comer 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 position 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 $52,000. The following accounting facts existed at the time of acquisition: Bobby's Donuts - Partial Balance Sheet Dec. 31, 2018 Assets Cash Accounts Rec. Allowance for Bad Debt Inventory Land Plant & Equipment Fair Value Book Value 45000 45000 12000 12000 1000 1000 9000 5000 15000 15000 29000 25000 Liabilities Accounts payable Mortgage Notes 41000 20000 8000 41000 20000 7000 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 was $45,000, including the goodwill computed at time of acquisition. The fair value of Bobby's Donuts on December 31, 2019 was $30,000. 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." Requirement 1. Compute the amount of Goodwill in the Bobby's Donuts acquisition on December 31, 2018. Please cite ASC 805-30-30-1 in your response. Requirement 2. Explain why goodwill impairment testing for Bobby's Donuts should be considered on December 31, 2019. Please cite ASC 350-20-35-3A through ASC 350-20-35-3G in your response. Requirement 3. Perform the goodwill impairment test for Bobby's Donuts on December 31, 2019 and include relevant calculations. Please cite ASC sections 350- 20-35-4 through 350-20-35-11 in your response. Requirement 4. What specific joumal entry should be made on December 31, 2019 to account for the impaired goodwill? Requirement 5. What is the remaining goodwill (new accounting basis) after the impairment loss journal entry has been performed on December 31, 2019? Please see ASC 350-20-35-12. Requirement 6. What is the maximum potential goodwill impairment loss that can be recorded on December 31, 2020 (if any)? Consider ASC 350-20-35-11 and ASC 350-20-35-12 in your response. Requirement 7. Is Lindsey Kline correct about her assumption of US GAAP goodwill recovery? Cite the relevant sub-section in ASC 350 in your response