Question

Kallus Corp. is an industry leader in the manufacture of toys. Each year, its design staff comes up with new ideas that are a great success. As a result, Kallus’s sales and profits consistently exceed those of other toy manufacturers. Over the past 10 years, Kallus has earned average net profits of $189 million, compared to $122 million for the typical companyin the toy industry.

Answer the following questions:

a. Does Kallus have goodwill? Explain.

b. Is goodwill an asset? Explain. (Does it meet the definition of an asset found in SFAS No. 6?

c. If you believe Kallus has goodwill, how would you go about measuring it? Explain.

d. Should Kallus Corp. report goodwill in the balance sheet? Why, or why not?

Answer 1

Requirement a
	Yes kallus have Goodwill as they outstanding sales and profit due to its creativity of their design staff.
Requirement b
	Yes Goodwill is an asset but in the case of Kallus, it does not meet the defination of asset.
	Goodwill, in general, is recorded in the books only when some consideration in money or money's
	worth has been paid for it.
	Read further requirement d)
Requirement c)
	Yes, it is possible to measure goodwill under certain cirmcumstances given below
	1	At the time of admission of new partner
	2	At the time of amalagamation & Mergers
	3	At the time of corporate acquisition e.g. acquisition of company to make
		its subsidiary or associate company
	4	At the time of purchase of business in case of entity other than company
	The following method are used to measur goodwill in the abovementioned occasion.
	1	Capitalization method
		Goowill = Normal capital employed less actual closing capital employed
		where normal capital employed is future maintainable profit / normal rate of return of the business
	2	Annuity method
		Where goodwill is nothing but present value of super profit of number of years is
		arrived at using annuity factor of discount rate
		Here, super profit is future maintainable profit minus actual capital employed multiplied by normal
		rate of return of business.
	3	Super profit method
		It super profit multiplied by number of years for which business advantage is expected to be sustained.
Requirement d
	No, Kallus can not report goodwill in the balance sheet unless it is paid in cash as explained in requirement 2
	US GAAP does not allow the self-generated goodwill to be recognized as an asset.
	Even IFRS does not allow self generated goodwill to be recognized as an asset as it does not
	meet the defination of intangible asset.
	IFRS states that Intangible asset like self generated goowill can be recognized only if
	a) when it is probable that future economic benefits belonging to an asset will flow to organization.
	b) The cost of an Intangible asset can be measured with reliability.
	So, IFRS also does not allow the self generated goodwill to be recognized as an asset.