SLN Ch 12 # 2

School: University of Wisconsin, River Falls - Course: ACCT 321 - Subject: Accounting

SLN - Ch 12 # 2: Goodwill, Impairment & R&D Goodwill: a.Conceptually, represents the future economic benefits arising from the other assets acquired in a business combination that are not individually identified and separately recognized. Only recorded when an entire business is purchased. b.Goodwill is measured as the excess of cost of the purchase over the FMV of the identifiable net assets (assets less liabilities) purchased. c.Internally created goodwill is not recorded on the balance sheet. d.Goodwill is considered to have an indefinite life and therefore should not be amortized. In class example 3 - Recording Goodwill:Multi-Diversified, Inc. decides that it needs a parts division to supplement its existing tractor distributorship. The president of Multi-Diversified is interested in buying Tractorling Company. The illustration presents the statement of financial position of Tractorling Company. Tractorling Co Balance sheet as of 12/31/17 Assets: Cash25,000 Accounts Receivable35,000 Inventory42,000 Property, plant and equipment (net)153,000 Total assets255,000 Liabilities and equity: Current liabilities55,000 Capital Stock100,000 Retained earnings:100,000 Total Liab. & Equity255,000 Multi-Diversified investigates Tractorling's underlying assets to determine their fair values. Fair values (if different than the cost on the balance sheet): Inventory122,000 Property, Plant & Equip, net205,000 Patents18,000 Liabilities(55,000) Tractorling Company decides to accept Multi-Diversified's offer of $400,000. Required:Determine the value of the goodwill, if any, and record the related journal entry. Step 1: determine the fair value of the net assets assigned to the purchase price. Net assets = assets - liabilities

Cash25,000 Accounts Receivable35,000 Inventory122,000 - Fair value because its different from cost on b/s Property, Plant & Equip, net205,000 - Fair value because its different from cost on b/s Patents18,000 - Fair value because its different from cost on b/s Liabilities(55,000) Fair value of Net assets:350,000 Step 2:calculate goodwill: Purchase price400,000 Less fair value of net assets:350,000 Goodwill:50,000 Step 3:Record the journal entry - Multi-diversified (the purchasing company) records the transaction as follows: Dr. Cash25,000 Dr. Accounts Receivables35,000 Dr. Inventory122,000 Dr. Property, Plant, & Equip.205,000 Dr. Patents18,000 Dr. Goodwill50,000 (calculated above) Cr. Liabilities55,000 Cr. Cash400,000 (purchase price)