When a company buys more than 50 percent of another company’s stock, the investee company is called a subsidiary. The price the investing company pays that exceeds the fair market value of the subsidiary’s net assets is called goodwill, which you report on your balance sheet as a long-term asset. If the value of your company’s investment in a subsidiary decreases to less than its accounting value, you account for the write-off by reducing your goodwill account in your records. This creates an expense, which reduces your net income on your income statement.
1. Determine the amount of the investment in the subsidiary that you must write off. For example, assume you must write off $2 million of your investment in a subsidiary.
2. Debit the account called “impaired goodwill expense” by the amount of the write-off in a journal entry in your accounting records. This increases the impaired goodwill expense account. In this example, debit your impaired goodwill expense account by $2 million.
3. Credit your goodwill account by the same amount of the write-off in the same journal entry. This decreases your goodwill account by the amount of the write-off. In this example, credit your goodwill account by $2 million.
4. Write “Impaired Goodwill Expense” and the amount of the expense as a line item before the line item called “income from continuing operations” on your income statement to report the amount of the write-off. In this example, write “Impaired Goodwill Expense $2 million” on your income statement.
5. Subtract the amount of the write-off from your previous goodwill balance. Report the new balance in the long-term assets section of your balance sheet. Continuing with the example, if your previous goodwill balance was $5 million, subtract $2 million from $5 million to get $3 million as your new goodwill balance. Write “Goodwill $3 million” as a line item on your balance sheet.
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