Gumdrop spent $2 million in 2020 on a customer service course for all of its employees,...

Gumdrop spent $2 million in 2020 on a customer service course for all of its employees, and the customer reviews went up from a 3 star average to a 4.5 star average. Gumdrop records this expenditure of $2 million under the goodwill account, since the expenditure has improved the brand equity of the firm. Are they acting in accordance of US GAAP? Why or why not?

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Expert Solution

Goodwill is an intangible asset which has indefinite useful life.Goodwill is only recorded during business combination or acquisition, no internally generated goodwill is recorded in books.Under U.S. GAAP, the value of goodwill is recorded as the excess of the cost of an acquisition price over the fair value of acquired net assets identified during business combination.

In the given situation Gumdrop has spent $ 2 miilion and considering to record this amount as goodwill.This amount should not be recorded as goodwill as this would be internally generated goodwill and as per GAAP this is not recorded.This should be recorded in income statement as an expense.

Gumdrop is not acting in accordance with US GAAP, Goodwill should not be recorded and amount spend should be recorded in income statement.

ekkarill92 answered 2 years ago

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