Goodwill - without an exchange transaction that puts a...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Goodwill Usually the largest intangible asset that appears on a company's balance sheet is goodwill. Goodwill represents the value of all favorable attributes that relate to a company that are not attributable to any other specific asset. These include exceptional management, desirable location, good customer relations, skilled employees, high-quality products, fair pricing policies, and harmonious relations with labor unions. Goodwill is unique because unlike other assets such as investments, plant assets, and even other intangibles, which can be sold individually in the marketplace, goodwill can be identified only with the business as a whole . If goodwill can be identified only with the business as a whole, how can it be determined? Certainly, many business enterprises have many of the factors cited above (exceptional management, desirable location, and so on). However, to determine the amount of goodwill in these situations would be difficult and very subjective. In other words, to recognize goodwill
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: without an exchange transaction that puts a value on the goodwill would lead to subjective valuations that do not contribute to the reliability of financial statements. Therefore, compa-nies record goodwill only when there is an exchange transaction that involves the purchase of an entire business. When an entire business is purchased, goodwill is the excess of cost over the fair market value of the net assets (assets less liabilities) acquired. In recording the purchase of a business, a company debits the identifiable acquired assets and credits liabilities at their fair market values, credits cash for the purchase price, and records the difference as the cost of goodwill. Goodwill is not amortized because it is considered to have an indefinite life. However, it must be written down if a company determines the value of goodwill has been permanently impaired....
View Full Document

This note was uploaded on 11/08/2011 for the course ACCOUNTING ac 201 taught by Professor - during the Spring '11 term at Montgomery.

Ask a homework question - tutors are online