ACME, Inc. paid $30,000,000 to purchase Arthur, Ltd. At the dateof purchase, Art

Question

ACME, Inc. paid $30,000,000 to purchase Arthur, Ltd. At the dateof purchase, Arthur, Ltd. had assets with a current market value of$50,000,000 and liabilities with a current market value of$26,000,000.

    

a.

Determine the amount of goodwill ACME, Inc., should report as aresult of the purchase.

b.

How should ACME, Inc., report the goodwill in its financialstatements?

a.

Determine the amount of goodwill ACME, Inc., should report as aresult of the purchase.

b.

How should ACME, Inc., report the goodwill in its financialstatements?

Explanation / Answer

a)   Goodwil of Arthur Ltd.       ================= Net worth = Total Assets - Total Liabilities = $50,000,000 -$26,000,000   =   $24,000,000 Amount paid to Arthur Ltd. by ACMEInc.                                                     =   $30,000,000                                                                                                                            --------------                               Goodwill                                                                               $ 6,000,000                                                                                                                            ========== b)   Record of goodwill       ==============       A company should recordgoodwill only when purchasing an entire "going (business)concern"--for example, a       competitor's propertiesand customers--for more than the "fair (market) value" price. Thepurchased price of the       acquired business less thefair market value of net tangible and identifiable intangibleassets--goodwill--is often called a       "plug," "gap filler," ormaster valuation" account. Firms should not recognize goodwillgenerated internally, even if they       can prove that theirassets are worth more than they paid, because no objectivevaluation method arises. The new       accounting standards areof particular interest to bankers, who must reassess their clients'financial statements in light of       these significant changesto the reports.              Since ACME inc. hasacquired the entire business of Arthur Ltd. and has paid $6 millionover its net worth. The       balance is considered aspayment towards goodwill. ACME Inc. should report this goodwill intheir finacial statement       as an intangibleassets.           The journal entry torecord the acquisition in the books of ACME Inc. :       Assets from ArthurLtd.                                    $50,000,000       Goodwill                                                          $ 6,000,000                                Liabilitiesof ArthurLtd.                                                            $26,000,000                Bank                                                                                        $30,000,000  

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