On January 1, 2016, Zarto Inc. purchases 100% of ABC Inc. for $9.6 million. At the time of acquisition, the fair market value of ABC’ tangible net assets (excluding goodwill) is $7.9 million. Zarto Inc ascribes the excess of $1,700,000 to goodwill. During the year the fair value of ABC Inc declines to $8.0 million and the fair value of ABC’ tangible net assets is estimated at $6.8 million as of December 31, 2016.
a. Determine if the goodwill has become impaired and, if so, the amount of the impairment.
b. What impact does the impairment of goodwill have on Zarto Inc’s financial statements?