Nature of Goodwill and its accounting

This document discusses the nature of goodwill and its accounting in company accounting. It explains how goodwill is calculated and recorded as an intangible asset in the balance sheet. The document also provides an example of an acquisition analysis and consolidated journal entries.

Company accounting ACCT20073
2019

Company accounting
MEMO TO: Board of directors Patagonia Ltd
FROM: Ms Picos
DATE: May 10, 2019
SUBJECT: Nature of Goodwill and its accounting
Goodwill of $50000 has been calculated on the acquisition of Salto Ltd. Goodwill has arisen
due to the difference in Fair Value of Net Tangible and Intangible Assets took over and
purchase consideration actually paid by us. In our case, we are giving $50000 more than what
is the actual fair value of Assets taken over by us. This Goodwill or extra payment is
generally done based on the value of the Company’s Brand, good customer base, customer
relations, employee relations, any patents, etc.
Goodwill is recorded as Intangible Asset in the balance sheet under Non-current Assets (Leo,
2011). The company would be required to evaluate goodwill once a year and adjust the
Impairment if any. Thus there would be no future effects on Profit and loss account or other
comprehensive income if no impairment arises. Only in case of any impairment in the value
of goodwill that is a reduction in fair value as compared to that recorded in books than the
difference will be amortized in Books (Laux, 2014)
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Company accounting
Answer – 2
a. Acquisition Analysis on 1st July 2014
Calculation of assets taken over
Particulars Amount($)
Share Capital 1,80,000.00
General Reserve 34,800.00
Retained Earning 66,000.00
Goodwill
-
7,200.00
Plant 2,100.00
Revaluation Profit 3000 less
30%
Inventory 4,200.00
Revaluation Profit 6000 less
30%
Patents 10,500.00 Valuation 15000 less 30%
Total 2,90,400.00
Calculation of Consideration Paid
Particulars Amount($)
Shares of Padda ltd 1,50,000.00
Cash 60,000.00
Artworks 90,000.00
Less: Dividend Receivable -12,000.00
Total 2,88,000.00
Gain on Business Purchase 2,400.00
b. Consolidated journal entries
Consolidation Journal Entries for 1 July
2014
Particulars Dr. Cr.
1 Share Capital 1,80,000.00
Retained Earning 66,000.00
General reserve 34,800.00
Business Valuation Reserve 9,600.00 (7200+2400)
To Gain On Business Purchase
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Company accounting
2,400.00
To Shares of Slang Ltd 2,88,000.00
2 Legal Accounting Charges 7500
Share Issue Charges 6000
To Cash A/c 13500
Consolidation Journal Entries for 30
June 2019
1 Share Capital 2,40,000.00
Retained Earning 3,600.00
General reserve 34,800.00
Business Valuation Reserve 9,600.00
To Shares of Slang Ltd 2,88,000.00
Consolidation Journal Entries for 1 July 2014
Particulars Dr Cr.
1 Patent A/c 15000
Plant and Machinery A/c 264600
Inventory A/C 28500
Receivable A/C 22800
Cash A/c 7500
Capital Res A/c (Bal Fig) 9600
To Dividend Payable 12000
TO Provisions 28800
To Shareholders of Slang Ltd 288000
2 To Shareholders of Slang Ltd 300000
To Equity Share Capital 150000
To Cash 60000
To Artworks 90000
3 Legal Accounting Charges 7500
Share Issue Charges 6000
To Cash A/c 13500
Consolidation Journal Entries for 30 June 2019
1 Plant and Machinery A/c 132300
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Company accounting
Receivable A/C 22800
Cash A/c 24000
Goodwill(Bal Fig) 77700
TO Provisions 28800
To Shareholders of Slang Ltd 228000
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Company accounting
References
Laux, B. (2014). Discussion of The role of revenue recognition in performance reporting.
Accounting and Business Research. 44(4), 380-382. Retrieved from:
https://doi.org/10.1080/00014788.2014.897867
Leo, K. J. (2011). Company Accounting (9th ed). Boston:McGraw Hill
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