Question: Impairment of Goodwill (Hard) A firm made an acquisition at the end of 201 0 and recorded the acquisition cost of $428 million on its balance sheet as tangible assets of $349 million and goodwill of $79 million. The firm used a required return of 10 percent as a hurdle rate when evaluating the acquisition and determined that it was paying fair value.
a. What is the projected residual income from the acquisition for 2011?
b. By the end of 2011, the tangible assets from the acquisition had been depreciated to a book value of $301 million. Management ascertained that the acquisition would subsequently earn an annual return of only 9 percent on book value at the end of 2011. What is the amount by which goodwill should be impaired under the FASB and IASB requirements for impairment?