Question

Recording Goodwill upon Acquisition

On January 1, 2020, the balance sheet of Naperville Company (a sole proprietorship) was as follows.

Assets		Liabilities
Accounts receivable (net of allowance)	$96,000	Current	$60,800
Inventory	144,000	Noncurrent	128,000	$188,800
Plant and equipment (net of depreciation)	320,000	Equity
Land	48,000	Owners’ equity		419,200
Total	$608,000	Total liabilities and owners’ equity		$608,000

On January 1, 2020, Chicago Corporation purchased all of the assets and assumed all of the liabilities listed on the above balance sheet for $464,000 cash. The assets, on date of purchase, were valued by Chicago Corporation as follows: accounts receivable (net), $80,000; inventory, $136,000; plant and equipment (net), $320,000; and land, $72,000. In addition, Chicago Corporation estimated purchased intangible assets of $3,200 for customer list and $12,800 for trade names (both previously unrecorded). The liabilities were valued at their carrying amounts.

Required

a. Compute the amount of goodwill included in the purchase price paid by Chicago Corporation.

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b. Provide the entry that Chicago Corporation should make to record the purchase of Naperville Company.

Account Name	Dr.	Cr.
Accounts Receivable (net)
Inventory
Plant and Equipment (net)
Land
Intangible Asset—Customer List
Intangible Asset—Trade names
Goodwill
Current Liabilities
Noncurrent Liabilities
Cash

c. What is the minimum amount of goodwill that Chicago Corporation can amortize at the end of 2020?

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Answer 1

a.)

GL Heads	Fair value of Identifiable Net Assets as on January 1,2020 (Amt. in $)
Accounts receivable(net of allowance)	80000
Inventory	136000
Plant and equipment (net of depreciation)	320000
Land	72000
Intangible Asset-Customer list	3200
Intangible Asset-Trade names	12800
Total Assets (A)	624000
Current Liabilities	60800
Non Current Liabilities	128000
Total Liabilities (B)	188800
Net assets (A-B)	435200
Calculation of goodwill on acquisition:-
Particulars	(Amt. in $)
Investment	464000
Less:- Fair value of Identifiable Net Assets on acquisition date	435200
Goodwill on acquisition	28800

b.)

Account Name	Dr. (Amt. in $)	Cr. (Amt. in $)
Accounts receivable(net of allowance)	80000
Inventory	136000
Plant and equipment (net of depreciation)	320000
Land	72000
Intangible Asset-Customer list	3200
Intangible Asset-Trade names	12800
Goodwill	28800
Current Liabilities		60800
Non Current Liabilities		128000
Cash		464000
TOTAL	652800	652800
(Being Identifiable net assets of Naperville taken over)

c.) The acquirer measures goodwill on acquisition at the amount recognized at the acquisition date. It is not required to be amortized over any period of time since goodwill has an indefinite life. However, it should be tested for impairment at every end and any impairment loss if any can be recognized on the same.

Hence, there is not as such minimum amount by which goodwill can be amortized at the end of 2020 since it has an indefinite life, however, it can be impaired with any amount as per the impairment testing done.