Nature of Goodwill and Accounting Treatment

This article discusses the nature of goodwill and its accounting treatment in the acquisition process. It also explains the concept of residual value and its impact on goodwill.

Running Head: COMPANY ACCOUNTING 1
COMPANY ACCOUNTING

Running Head: COMPANY ACCOUNTING
Table of Contents
Question 1...................................................................................................................................................3
Question 2...................................................................................................................................................4
References...................................................................................................................................................6

Running Head: COMPANY ACCOUNTING
Question 1
MEMORANDUM
DATE: 12TH MAY 2019
TO: Directors
FROM: Ms Picos
SUBJECT: Nature of the goodwill and the accounting treatment of the residual value
This memorandum is set up to have a comprehension of nature of the goodwill of the firm Salto
Limited and its treatment in the process of the acquisition. Ordinarily the goodwill is considered
as the elusive intangible resource. The idea of the goodwill came into existence when the
companies are ready to pay the prices that are more accelerated in terms of the fair value of the
other assets of the company. what makes the goodwill can be answered by the analyzing of the
several factors such as the trustworthiness of the customers, their loyalty towards the company,
reliable scope of clients, workforce who is essentially capable, a strong name for itself are a
portion of the significant explanations behind the development of the altruism.
Accounting treatment of the Goodwill in the books of the Purchasing Company to be specific
Patagonia constrained, as it obtained Salto Limited. Assets will be debited, goodwill account will
also be debited and the liabilities as well as the cash in hand will be settled for the same.
Assets A/c Dr.
Goodwill A/c Dr.
To Liabilities
To cash
The whole estimation of the goodwill, will be exposed to the amortization while in a portion of
the cases a residual value can generally be identified that reduces the value of the goodwill.
The outsider has an arrangement with the Patagonia Limited to buy the benefit once the residual
life of the goodwill comes to an end or,
The residual value can be directed by reference to a distinguishable market for that advantage
and that promotion is depended upon to exist around the completion of the advantage's useful
life. Henceforth, the residual value of 50000 is to be accounted for in the books of records and it
will be amortized over the period of the time (Sedki, Posada & Pruske, 2018).

Running Head: COMPANY ACCOUNTING
Question 2
JOURNAL ENTRIES
Date Particulars Debit Credit
30th June 2019 Amortization Expense (patents) Dr.
$
3,000.00
Retained Earnings
$
8,400.00
To business combination valuation reserve
$
10,500.00
To income tax expense
$
900.00
(for patents amortized and tax deducted)
30th June 2019 Accumulated depreciation plant Dr.
$
38,400.00
TO Plant
$
35,400.00
To Deferred tax liability
$
900.00
To BCVR
$
2,100.00
(For interest charged on loan by the bank)
30th June 2019 Inventories A/c Dr.
$
6,000.00
To deferred tax liabilities
$
1,800.00
To BCVR
$
4,200.00
(For adjustments made)
30th June 2019
Depreciation expense -
plant Dr.
$
300.00
Retained earnings (1/7/18)
$
1,200.00
To Accumulated depreciation – plant
$
1,500.00
(for (1/10th p.a of the 2100 charged )
30th June 2019 Deferred tax liability
$
450.00
To Income tax expense Dr.
$
90.00

Running Head: COMPANY ACCOUNTING
To Retained earnings (1/7/19)
$
360.00
(for deferred tax liability cleared )
at 1st July 2014
JOURNAL ENTRIES of pre-acquisition
Date Particulars Debit Credit
1st July 2014 Retained Earnings Dr.
$
66,000.00
Share capital
$
180,000.00
General Reserve
$
34,000.00
Business combination valuation reserve
$
10,400.00
To gain on bargain
purchase
$
2,400.00
To shares in Slang Limited
$
288,000.00
(for shares in slang limited and consideration given)
1st July 2014 Dividend Payable Dr.
$
12,000.00
To dividend receivable
$
12,000.00
(for dividend received)
JOURNAL ENTRIES of pre-acquisition on 30th June
Particulars Debit Credit
30th June 2019 Retained earnings (1/7/18)* 600
Share capital 240000
general reserve 34800
BCVR 12600
To shares in Slang Limited 288000
(For shares transferred to slang limited)

Running Head: COMPANY ACCOUNTING
References
Sedki, S. S., Posada, G. A., & Pruske, K. A. (2018). Differences Between US GAAP and IFRS
in Accounting for Goodwill Impairment and Inventory: Tax Treatment Under the Internal
Revenue Code. Journal of Accounting and Finance, 18(4).