Question

On January 1, 2017, Robinson Company purchased Franklin Company at a price of \(2,500,000. The fair market value of the net assets purchased equals \)1,800,000.

1. What is the amount of goodwill that Robinson records at the purchase date?

2. Explain how Robinson would determine the amount of goodwill amortization for the year ended December 31, 2017.

3. Robinson Company believes that its employees provide superior customer service, and through their efforts, Robinson Company believes it has created $900,000 of goodwill. How would Robinson Company record this goodwill?

Short answer

1. The amount of goodwill that Robinson records at the purchase date is $700,000.
2. Goodwill are not amortized.
3. Goodwill is not recorded unless an entire company or business segment is purchased.

Step-by-step solution

Goodwill

Goodwill is the excess of the purchase price paid for an acquired firm, over the fair value of its separately identifiable net assets.

(1) Computation of goodwill

$\begin{array}{rcl}\mathit{G}\mathit{o}\mathit{o}\mathit{d}\mathit{w}\mathit{i}\mathit{l}\mathit{l}& \mathbf{=}& \mathit{p}\mathit{u}\mathit{r}\mathit{c}\mathit{h}\mathit{a}\mathit{s}\mathit{e}\mathbf{}\mathit{p}\mathit{r}\mathit{i}\mathit{c}\mathit{e}\mathbf{-}\mathit{n}\mathit{e}\mathit{t}\mathbf{}\mathit{a}\mathit{s}\mathit{s}\mathit{e}\mathit{t}\mathit{s}\\ goodwill& =& \$2,500,000-\$1,800,000\\ goodwill& =& \$700,000\end{array}$

The amount of goodwill that Robinson records at the purchase date is $700,000.

(2) No, Robinson would not determine the amount of goodwill amortized.

Intangible assets like goodwill are not amortized. Instead, Robinson tested its goodwill annually for impairment, if necessary, an impairment loss is recorded.

(3) Robinson records goodwill only at the time when someone is going to purchase his company.

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 (excluding goodwill).