Explanation of Goodwill and its Accounting Treatment

This memorandum explains the nature of goodwill and its accounting treatment in the books of accounts, including the concept of goodwill, its nature, and accounting treatment. It also discusses the acquisition analysis and journal entries related to goodwill.

Running head: COMPANY ACCOUNTING
Company Accounting
Name of the Student:
Name of the University:
Author’s Note:

1COMPANY ACCOUNTING
Table of Contents
Answer to question 1:.................................................................................................................2
Answer to question 2:.................................................................................................................4
Acquisition Analysis:.............................................................................................................4
Journal Entries:.......................................................................................................................4
Bibliography:..............................................................................................................................6

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Answer to question 1:
MEMORANDUM
Date: 10 May 2019
To: The directors, Patagonia Ltd
From: Picos, the Chief Financial Officer
Subject: Explanation of about nature of goodwill and its accounting treatment
Introduction:
This memorandum is prepared to explain and illustrate the nature of goodwill and its
accounting treatment in the books of accounts, to make it clear whether the amount paid in
excess of net assets of the company acquired to be recognised as an asset in the books of
accounts. It further explains how the amount so recorded should be treated in future
accounting process.
Concept of Goodwill:
Goodwill is the good name or good image of the company which have been
developed through the provision of good services and offering of quality products for a very
long period of time. It helps an organisation to sell more products or to have more market
share than other competitors. It helps in earning supernormal profit in the market. Hence,
goodwill is an intangible thing which is helping the company as an asset to generate more
profit.
Nature of Goodwill:
On the basis of cost incurred to have the goodwill, it can be classified in two types,
one is inherent goodwill and the other is purchased goodwill. Inherent goodwill is developed
within an organisation through a long period of time by its quality products and service

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offerings and customer relationships. On the other hand, purchased goodwill is the excess
amount paid in acquiring the brand name or the net asset of an outside company. For
example, ABC Ltd is a renowned company in Australian Groceries market and it has $50
million of net assets. If $55 million is paid ac purchase consideration to acquire the business
of the ABC Ltd, the excess $5 million would be considered as the value of purchased
goodwill.
Accounting treatment:
Inherent goodwill is not recognised in the books of accounts as no cost or
consideration have been paid to build it up, but purchased goodwill must be recorded in the
books of accounts and should be treated as a non current asset. It must be subjected to fair
valuation at specified frequency of time to amortise its value according to the respective
accounting standards applicable to it.
Conclusion:
From the above discussion, it can be concluded that, excess amount paid in accusation
of a business would be treated as the value of goodwill and must be recorded in the books of
accounts, later on, applying the proper accounting standard, its value can be amortised.

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Answer to question 2:
Acquisition Analysis:
Share capital (180 000 shares) $ 1,80,000
General reserve 34,800
Retained earnings 66,000
Carrying Amount of net assets 2,80,800
Add: Fair Value adjustment (After tax)
(1800*70%) 1,260
Add: Dividend Payable 12,000
Fair Value of net assets 2,94,060
Purchase Consideration paid 3,00,000
Value of Goodwill $ 5,940
Journal Entries:
Padda Ltd
Journal
Date Particulars Debit Credit
01-Jul-14 Investment in shares of Slang Ltd
$
3,00,000
Cash $ 60,000
Share Capital $ 1,50,000
Inventories $ 90,000
(To record the acquisition of business)
01-Jul-14 Retained earnings
$
66,000
General reserve
$
34,800
Share Capital
$
1,80,000
Goodwill
$
5,940
Dividend Payable
$
12,000
Business Combination Valuation reserve
$
1,260
Investment in shares of Slang Ltd $ 3,00,000
(Consolidation entry on the date of acquisition)

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01-Jul-14 Accounting Expenses
$
7,500
Acquisition Expenses
$
6,000
Cash $ 13,500
(To record expenses)
30-Jun-19 Retained Earnings
$
1,32,300
Accumulated Depreciation $ 1,32,300
(To record depreciation for 5 years)
30-Jun-19 Retained Earnings
$
5,940
Goodwill $ 5,940
(To write off the goodwill)
30-Jun-19 Deferred tax Liability
$
1,782
Tax Expenses $ 1,782
(To eliminate the tax effect on above)
30-Jun-19 Dividend Payable
$
12,000
Dividend Receivable $ 12,000
(To eliminate the inter company dividend)
30-Jun-19 Patent
$
15,000
Retained Earnings $ 15,000
(To record unrecorded patent)
30-Jun-19 Tax Expense
$
4,500
Deferred Tax Liability $ 4,500
(To record tax expense on above)
30-Jun-19 Dividend Received
$
60,000
Bonus Dividend paid $ 60,000
(To eliminate intercompany payment of dividend)

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Bibliography:
Bloom, Martin. Double accounting for goodwill: A problem redefined. Routledge, 2013.
Li, Kevin K., and Richard G. Sloan. "Has goodwill accounting gone bad?." Review of
Accounting Studies 22, no. 2 (2017): 964-1003.
Yamey, B. S. "The Development of Company Accounting Conventions, by." In Evolution of
Corporate Financial Reporting (RLE Accounting), pp. 243-252. Routledge, 2014.