What is Goodwill?How is it treated under the Purchase method?

Solutions

Expert Solution

A firm may acquire reputation in market by doing business year after year with good conducts. Such market reputation indicates goodwill of that firm. This is an intangible (can’t be touched) but real asset (it exists) and appears in the asset side of firm’s balance sheet.

Purchase method:

Under this method goodwill is the product of super profit and the number of years’ of purchase.

Super profit = Average profit – Normal profit

Normal profit = Capital employed or net worth × Normal rate of return

Therefore,

Goodwill = Super profit × Number of years’ of purchase

Example: Suppose ABC firm purchases DEF firm with a goodwill treatment for 4 years under purchase method. Average profit of DEF is $56,000. Capital employed of DEF and normal rate of return are $500,000 and 8% respectively.

Thus,

Normal profit = $500,000 × 8% = $40,000

Super profit = 56,000 – 40,000 = $16,000

Goodwill = 16,000 × 4 = $64,000

jeff jeffy answered 7 months ago

Next > < Previous

Related Solutions

What is a bargain purchase option? How is it treated for a capital lease?

Under what circumstances does goodwill increase?

Answer the following true or false for each: 22. Under the goodwill method, if the partnership...

Answer the following true or false for each: 22. Under the goodwill method, if the partnership acquires a partner’s interest at more than book value, goodwill can be recorded at either the amount traceable to the withdrawing partner’s capital or the amount traceable to the entire entity. 23. In a general partnership, all partners have the ability to enter into binding contracts (on the partnership) related to the partnership business purpose. 24. If a partner’s capital account becomes negative (a...

What does goodwill represent? Under SFAS 142, we are required to test goodwill for impairment at...

What does goodwill represent? Under SFAS 142, we are required to test goodwill for impairment at least annually. How is this done? Is impairment of goodwill reversible under U.S. GAAP? How about under IFRS?

5. Recognizing goodwill or gain from a bargain purchase is thefinal step of acquisition method....

5. Recognizing goodwill or gain from a bargain purchase is the final step of acquisition method. Therefore, Goodwill or Gain on bargain purchase is measured as the difference between the:Select one:a. Cost of the assets given up and the cost of the net assets acquired.b. Fair value of the consideration transferred, and the fair value of net identifiable assets.c. present value of the consideration transferred, and the present value of the net assets acquiredd. Cost of the net assets acquired,...

pick from the multiple choice Under the full goodwill method, a control premium is recognised when:...

pick from the multiple choice Under the full goodwill method, a control premium is recognised when: a. the parent paid more than the fair value for the shares they acquired. b. the parent paid less than the fair value for the shares they acquired. c. the consideration transferred by the parent is more than the fair value of the identifiable net assets acquired. d. the consideration transferred by the parent is less than the fair value of the identifiable net...

What kind of asset is goodwill? How do you determine the amount of goodwill? How do...

What kind of asset is goodwill? How do you determine the amount of goodwill? How do you treat goodwill subsequent to its acquisition?

Find the FASB rules that define how to compute the goodwill (or gain on bargain purchase)...

Find the FASB rules that define how to compute the goodwill (or gain on bargain purchase) in a business combination. Then find the general rule that says goodwill should not be amortized. (You may look for the allowable alternative of amortizing goodwill, for private companies.)

How do we calculate goodwill under U.S. GAAP? It is the reported RE on the subsidiary's...

How do we calculate goodwill under U.S. GAAP? It is the reported RE on the subsidiary's balance sheet. It is the sum of all assets and shares of stock used to purchase the subsidiary. It is the difference between the amount paid and the net assets of the subsidiary. None of these are the correct way to calculate the value of goodwill under U.S. GAAP. When can companies capitalize most of their R&D (research and development) costs? When the company...

1.What is glaucoma and how can it be treated? 2.What happens if it is not treated?...

1.What is glaucoma and how can it be treated? 2.What happens if it is not treated? 3.What is noise-inducing hearing loss? 4. Name people that are higher likely to get this and what is the treatment?

Subjects