Goodwill



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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