Donuts & Coffee opened its doors in 2018 on the corner of Geary and Masonic St. in

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Question:

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:

	Fair Value	Book Value
Assets	45,000	45,000
Accounts Rec.	12,000	12,000
Allowance for Bad Debt	1,000	1,000
Inventory	9,000	5,000
Land	15,000	15,000
Plant & Equipment	29,000	25,000

Liabilities
Accounts payable	41,000	41,000
Mortgage	2,000	2,000
Notes	8,000	7,000

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 (Multipart)

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.

2. Explain why goodwill impairment testing for Bobby’s Donuts should be considered on December 31, 2019. Please cite ASC350-20-35-3A through ASC 350-20-35-3G in your response.

3. Perform the goodwill impairment test for Bobby’s Donuts on December 31, 2019, and include your calculations. Please cite ASC sections 350- 20-35-4 through 350-20-35-11 in your response.

4. What specific journal entry should be made on December 31, 2019, to account for the impaired goodwill?

5. What is the reaming goodwill after the impairment entry has been performed on December 31, 2019?

6. What is the maximum potential goodwill impairment that can be recorded on December 31, 2020 (assume no goodwill impairment recorded so far in 2020)? Please cite ASC350-20-35-11 in your response.

7. Is Lindsey Kline correct about her assumption of US GAAP goodwill recovery? Consider ASC 350-20-35-13 in your response.