Asked by Charles Griffey on Jun 07, 2024
Verified
Piri Ltd. acquired 100% of the commons shares of Golden Co. This business combination resulted in $100,000 of goodwill. Piri allocated the goodwill to three cash-generating units. At its year-end, Piri conducts a goodwill impairment test. Which of the following statements about the impairment test is true?
A) The impairment test is applied to Golden Co. as a whole.
B) The impairment test is applied to the business combination as a whole.
C) The impairment test is applied to each of the three cash-generating units to which goodwill has been allocated.
D) Piri is not required to conduct an impairment test unless its circumstances have changed materially from its previous year.
Goodwill Impairment
Goodwill impairment occurs when the fair value of goodwill drops below its carried value on the balance sheet, leading to a write-down in its value.
Cash-Generating Units
the smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows from other assets or groups of assets.
Business Combination
The process of uniting multiple businesses into one single entity, often through acquisitions or mergers.
- Understand the principles and procedures of goodwill impairment testing.
Verified Answer
MP
Manpreet pahwaJun 11, 2024
Final Answer :
C
Explanation :
When goodwill is allocated to multiple cash-generating units, an impairment test must be conducted for each unit separately. Therefore, in this scenario, Piri must conduct an impairment test for each of the three cash-generating units to which the goodwill has been allocated. Option A and B are incorrect because the impairment test is not applied to Golden Co. as a whole or the business combination as a whole. Option D is incorrect because Piri is required to conduct an impairment test annually or when there are indications that the carrying amount of goodwill may be impaired, regardless of whether its circumstances have changed materially from the previous year.
Learning Objectives
- Understand the principles and procedures of goodwill impairment testing.