Accounting Treatment of Goodwill in Company Acquisition

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: 14TH MAY 2019
TO: Directors
FROM: Ms Picos
SUBJECT: Accounting treatment of the residual value calculated at $50000.
The purpose of the memorandum is mainly to retrieve the idea of the acquisition of the goodwill
by Patagonia Limited, of that of Slang Limited. In order to understand this mechanism the
important thing is to understand what goodwill is. The goodwill is considered as the intangible
asset that is recorded on the asset side of the balance sheet. It is calculated as the difference
between the amount of money paid to acquire the Slang Limited, and the fair book value of the
company’s net assets. The goodwill is recorded when the organizations are relatively agreed on
paying the higher prices in comparison to the other net assets value. The intangible assets also
have the useful life which is identifiable or indefinite. As per the requirements of the GAAP the
assets are not recorded in the balance sheet. The goodwill is also affected by several factors
which include the capable employees and customers, the loyal company, the effective investors
and the stakeholders as well1.
The accounting treatment of the goodwill in case of the acquisition of the goodwill can be
adjusted by passing the following journal entry.
Assets A/c Dr.
Goodwill A/c Dr.
To Liabilities
To cash
Hence the residual value of the $50000 shall not be recorded as it would not be amortized as per
the guideline of the GAAP. The impairment of the assets occurs when the market value drops
against the historical cost. Instead the management is responsible for valuation of the goodwill
and the impairment shall be determined. Hence the residual value will not be recorded on the
balance sheet2.
1 "Guide To Goodwill On The Balance Sheet", The Balance (Webpage, 2019)
https://www.thebalance.com/goodwill-on-the-balance-sheet-357278
2 "IFRS 3 — Business Combinations", Iasplus.Com (Webpage, 2019)
https://www.iasplus.com/en/standards/ifrs/ifrs3