Question

Kelly Corporation acquires all of the assets and liabilities of Lawson Co. at an acquisition cost that is $50 million above the fair value of identifiable net assets acquired. Three months after the acquisition, it is determined that because of a downturn in the economy after the acquisition, acquired brand names with indefinite lives are worth $5,000,000 less than originally estimated. The entry to reflect this new information includes:

Answer 1

Answer: A. A credit to goodwill of $5,000,000

Explanation:

When a company is bought for more than the fair value of its identifiable net assets, the premium paid is called goodwill. If after the acquisition, it is discovered that one of the reasons for coming up with that goodwill is no longer viable, the goodwill can be reduced or impaired.

This is the case here. The brand names are worth less than they should so goodwill will have to be adjusted downwards to reflect that. As goodwill is an asset, reducing it would mean crediting it so goodwill should be credited by the $5,000,000 amount.