Question :
As a new intern for the local branch office of a national brokerage firm, you are excited to obtain an assignment that allows you to use your accounting expertise. Your supervisor gives you the spreadsheet below, which contains data for the most current quarter for three companies that the firm has been recommending to it clients as "buys." Each of the companies' returns on assets has outperformed their industry cohorts in the past, but provided recent challenges in their markets; there is concern that the companies may experience operating challenges and lower earnings.
- (a) The fair value for each of these companies is lower than the equivalent book value. What implications does this have for each company's future prospects?
- (b) To date, none of these companies has recorded goodwill impairments. Your supervisor suspects that they will require to record impairments in the near future, but he is unsure about the goodwill impairment rules. Is it likely that these companies will recognize impairments? Describe.
- (c) Using the data on the previous page, evaluate the amount of goodwill impairment for each company and prepare the journal entry to record the impairment. For each company, you may consider that the book value less the carrying value of the goodwill approximates the fair value of the companies' net assets.
- (d) Show the effects of your entries in part (c) on your evaluation of these companies based on the return on assets ratio.