Q24. Goodwill
Entity A acquired Entity S with the following information:
(a) Fair value of the assets of Entity S = $900,000
(b) Fair value of the liabilities of Entity S = $400,000
(c) Entity A paid $520,000 in cash.
Prepare a journal entry to record this transaction.
A24. Goodwill = Purchase price of the business – Fair value of net assets acquired
| Debit | Credit | |
| Assets | 900,000 | |
| Goodwill | 20,000 | |
| Liabilities | 400,000 | |
| Cash | 520,000 |
[Note]
1. Increase in goodwill (asset): debit
2. Fair value of net assets = fair value of assets – fair value of liabilities
= $900,000 – $400,000 = $500,000
3. Goodwill = payment – fair value of net assets
= $520,000 – $500,000 = $20,000
4. Goodwill is not amortized.
5. Goodwill is tested for impairment.
[Exercise]
Entity B acquired Entity T with the following information:
Fair value of the assets of Entity T = $850,000
Fair value of the liabilities of Entity T = $610,000
Entity B paid $275,000 in cash.
| Debit | Credit | |
| Assets | 850,000 | |
| Goodwill | 35,000 | |
| Liabilities | 610,000 | |
| Cash | 275,000 |
[Note]
1. Fair value of net assets = $850,000 – $610,000 = $240,000
2. Goodwill = payment – fair value of net assets
= $275,000 – $240,000 = $35,000
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