Goodwill Results from the Purchase of One Firm by Another

Essay

Goodwill results from the purchase of one firm by another for a price that is greater than the fair value of the net assets acquired. On January 1, 2014, Blue Grass Co. purchased Red Grass Co. for $1,200,000 when the net assets were valued at $1,000,000. Goodwill will be tested annually for impairment. Assume that after the first year there was an impairment of $15,000.
Required:
(a.) Compute the value of goodwill to be recorded on the books of Blue Grass Company upon the purchase of the business.
(b.) What is impairment and how is the first year's impairment recorded in the books?