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Chapter 8: 14DQ (page 386)

Question: When do we know that a company has goodwill? When can goodwill appears on a company’s balance sheet?

Short Answer

Expert verified

Goodwill is the excess of the purchase price paid for an acquired firm, over the fair value of is separately identifiable net assets. Goodwill is recorded in the balance sheet when an entire company is purchased.

Step by step solution

01

Goodwill

Goodwill is the amount by which a company’s value exceeds the value of its assets and liabilities. This implies that the company as a whole has certain valuable attributes not measured among its assets and liabilities. These can include superior management, skilled workforce, good supplier or customer relations, quality products or services, good location, or other competitive advantages.

02

When goodwill is recorded in the balance sheet

Goodwill is not recorded unless an entire company or business segment is purchased. Purchased goodwill is measured by taking the purchase price of the company and subtracting the market value of its net assets. Goodwill is measured as the excess of the cost of an acquired entity over the value of the acquired net assets. Goodwill is recorded as an asset, and it is not amortized

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Most popular questions from this chapter

Question: Garcia Co. owns equipment that cost \(76,800, with accumulated depreciation of \)40,800. Garcia sells the equipment for cash. Record the sale of the equipment under the following three separate cases assuming Garcia sells the equipment for (1) \(47,000 cash, (2) \)36,000 cash, and (3) $31,000 cash

Question: On January 2, 2017, the Matthews Band acquires sound equipment for concert performances for \(65,800. The band estimates it will use this equipment for four years, during which time it anticipates performing about 200 concerts. It estimates that after four years it can sell the equipment for \)2,000. During the year 2017, the band performs 45 concerts. Compute the year 2017 depreciation using the unit-of-production method.

Caleb Co. owns a machine that costs \(42,400 with accumulated depreciation of \)18,400. Caleb exchanges the machine for a newer model that has a market value of \(52,000.

  1. Record the exchange assuming Caleb paid \)30,000 cash and the exchange has commercial substance.
  2. Record the exchange assuming Caleb paid $22,000 cash and the exchange has commercial substance.

Mercury Delivery Service completed the following transactions and events involving the purchase and operation of equipment for its business.

2016

Jan. 1 Paid \(25,860 cash plus \)1,810 in sales tax for a new delivery van that was estimated to have a five-year life and a \(3,670 salvage value. Van costs are recorded in the Equipment account.

3 Paid \)1,850 to install sorting racks in the van for more accurate and quicker delivery of packages. This increases the estimated salvage value of the van by another \(230.

Dec. 31 Recorded annual straight-line depreciation on the van.

2017

Jan. 1 Paid \)2,064 to overhaul the van’s engine, which increased the van’s estimated useful life by two years.

May 10 Paid $800 to repair the van after the driver backed it into a loading dock.

Dec. 31 Record annual straight-line depreciation on the van. (Round to the nearest dollar.)

Required Prepare journal entries to record these transactions and events.

Question: What are the characteristics of an intangible asset?
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