University Accounting Assignment: Goodwill and Accounting Practices

This assignment solution addresses the nature of goodwill and its accounting treatment, specifically focusing on purchased and inherent goodwill. The document begins with a memorandum from a Chief Financial Officer to the Directors of Patagonia Ltd, explaining the concept of goodwill as the ability of a business to earn supernormal profits. It distinguishes between inherent goodwill, arising from brand loyalty and image, and purchased goodwill, which is the excess paid during acquisition. The solution details the accounting treatment, suggesting that inherent goodwill should not be recognized in the balance sheet, while purchased goodwill can be recognized and is subject to impairment testing. The assignment includes a bibliography citing relevant academic sources, providing a comprehensive overview of the topic. This assignment is a valuable resource for students studying company accounting, offering clear explanations and practical applications of key accounting principles 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
Bibliography:..............................................................................................................................6

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Answer to question 1:
EMORANDUM
Date: 08 May 2019
To: Directors, Patagonia Ltd
From: Ms Picos, The Chief Financial Officer
Subject: Nature of goodwill and its accounting treatment
Introduction:
Goodwill is the inherent power of a business organisation to earn a supernormal profit
in a market over the other organisations. It is the image and brand loyalty of the company for
which the company is able to sell products with a high demand for their products in the
market. There are various types of goodwill and respective accounting treatment. In this
memorandum those natures of goodwill and their respective treatment have been discussed.
Nature of Goodwill:
There are mainly two types of goodwill, one in purchased goodwill and the other is
inherent goodwill. Inherent goodwill is the brand loyalty and image of the company, which
the company builds up by giving premium services and offering quality products to their
customers for a long time. It follows the brand name of the company. Purchased goodwill is
the excess amount paid to the acquiring company while purchasing the existing business of
the acquiring company. Therefore, purchased goodwill is the difference between the cost of
acquisition and the net value of assets of the business.
Accounting treatment:

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It is a better practice not to recognise the inherent goodwill in the balance sheet, as no
consideration has been paid to acquire such goodwill, a valid transaction cannot be entered in
the books of accounts. It can be shown as a footnote to the balance sheet but it cannot be
shown as a real goodwill in the balance sheet. On the other hand, the value of purchased as
calculated by the difference between the cost of acquisition and the net assets value, can be
shown in the books of accounts and can be reported in the balance sheet.
Conclusion:
It can be concluded from the above discussion that, purchased goodwill can be
recognised in the books of accounts as the excess of purchase consideration paid over the
value of the business and it must be subject to impairment testing over a specified frequency
of time.

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Answer to question 2:

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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.