Accounting Treatment of Goodwill in Company Acquisition

This document discusses the accounting treatment of goodwill in case of company acquisition. It explains what goodwill is, how it is calculated, and its impact on the balance sheet. The document also discusses the factors affecting goodwill and the guidelines provided by GAAP. References to external sources are provided for further reading.

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

Running Head: COMPANY ACCOUNTING

Running Head: COMPANY ACCOUNTING
Question 2
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)
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)

Running Head: COMPANY ACCOUNTING
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
To Retained earnings (1/7/19)
$
360.00
(for deferred tax liability cleared )
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)
Workings
Acquisition analysis of SLANG LIMITED
Net fair value of the identifiable assets of Slang Limited
Equity $ 180,000.00
General reserve $ 34,800.00
Retained earnings $ 66,000.00
$ 280,800.00

Running Head: COMPANY ACCOUNTING
Goodwill $ 7,200.00
Plant $ 2,100.00
Inventory $ 4,200.00
Patents $ 10,500.00
Net fair value $ 290,400.00
Consideration transferred $ 150,000.00
Cash $ 60,000.00
Artworks $ 90,000.00
less: dividend receivable $ (12,000.00)
$ 288,000.00
Gain on Bargain purchase $ 2,400.00
Goodwill adjustment $ (7,200.00)
Working of retained earnings
* 66000
gain on purchase bargain -2400
bonus dividend -60000
Add from BCVR inventory 4200
less BCVR goodwill -7200
Total Retained earnings 600

Running Head: COMPANY ACCOUNTING
References
"Guide To Goodwill On The Balance Sheet", The Balance (Webpage, 2019)
https://www.thebalance.com/goodwill-on-the-balance-sheet-357278
"IFRS 3 — Business Combinations", Iasplus.Com (Webpage, 2019)
https://www.iasplus.com/en/standards/ifrs/ifrs3