Company Accounting: Nature of Goodwill and Accounting Treatment

This document discusses the nature of goodwill and its accounting treatment in company acquisitions. It explains the factors that contribute to the formation of goodwill and the accounting entries involved. It also covers the concept of residual value and its impact on the amortization of intangible assets. The document includes examples and references for further reading.

Running head: Company accounting 1
Company accounting

Company accounting 2
Table of Contents
Question 1...................................................................................................................................................3
Question 2...................................................................................................................................................4
References...................................................................................................................................................7

Company accounting 3
Question 1
MEMORANDUM
DATE: 10TH MAY 2019
TO: Directors
FROM: Ms Picos
SUBJECT: Nature of the goodwill and the accounting treatment of the residual value
This memorandum is prepared to have an understanding of nature of the goodwill. By nature the
goodwill is considered as the intangible asset. The concept of the goodwill enters when the
company is looking for the acquisition of the other company and is willing to pay the price
higher than the normal than the fair value of the other assets. There are certain factors that are
responsible for making up the goodwill such as a loyal range of customers, workforce who is
pretty much talented, a solid name for itself are some of the major reasons for the formation of
the goodwill (Wen & Moehrle, 2016).
Accounting treatment of the Goodwill in the books of the Purchasing Company namely
Patagonia limited, as it acquired Salto Limited.
Assets A/c Dr.
Goodwill A/c Dr.
To Liabilities
To cash
The entire value of the goodwill will be subjected to the amortization whereas in some of the
cases a residual value may be determined which generally reduces the amortizable basis.
The remaining value of the amortizable intangible asset is assumed to be zero unless the entire
useful life is consumed in acquiring the enterprise. Also the useful life is shorter than the useful
economic life of the asset in either of the cases (Kimbro & Xu, 2016).
The third party has a deal with the Patagonia Limited to purchase the asset once the useful life
ends
The residual value can be dictated by reference to a detectable market for that advantage and that
advertise is relied upon to exist toward the finish of the benefit's helpful life. Therefore the
residual amount of 50000 is to be reported in the books of accounts and it will be amortized over
a period of time.

Company accounting 4

Company accounting 5
Question 2
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
Goodwill $ 7,200.00
Plant $ 2,100.00 3000 0.7
Inventory $ 4,200.00 6000 0.7
Patents $ 10,500.00 15000 0.7
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)
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

Company accounting 6
(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
Date Particulars Debit Credit
30th June
2018 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
2018 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
2018 Inventories A/c Dr.
$
6,000.00
To deferred tax liabilities
$
1,800.00
To BCVR
$
4,200.00
(For adjustments made)
30th June
2018 Depreciation expense - plant Dr.
$
300.00
Retained earnings (1/7/18)
$
1,200.00
To Accumulated depreciation – plant
$
1,500.00

Company accounting 7
(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 )
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)
Working of retained earnings
* 66000
gain on purchase bargain -2400
bonus dividend -60000
Add from BCVR inventory 4200
less BCVR goodwill -7200
600

Company accounting 8
References
Kimbro, M. B., & Xu, D. (2016). The accounting treatment of goodwill, idiosyncratic risk, and
market pricing. Journal of Accounting, Auditing & Finance, 31(3), 365-387.
Wen, H., & Moehrle, S. R. (2016). Accounting for goodwill: An academic literature review and
analysis to inform the debate. Research in Accounting Regulation, 28(1), 11-21.