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Chapter 9: Q18RQ (page 526)
What is goodwill? Is goodwill amortized? What happens if the value of goodwill has decreased at the end of the year?
The excess amount is paid over the fair market value of the net assets in the acquisition process. A company reporting under GAAP cannot amortize the goodwill.
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Whitney Plumb Associates surveys American eating habits. The company鈥檚 accounts include Land, Buildings, Office Equipment, and Communication Equipment, with a separate Accumulated Depreciation account for each asset. During 2018, Whitney Plumb completed the following transactions:
Jan. 1 Purchased office equipment, \(117,000. Paid \)77,000 cash and financed the remainder with a note payable.
Apr. 1 Acquired land and communication equipment in a lump-sum purchase. Total cost was \(350,000 paid in cash. An independent appraisal valued the land at \)275,625 and the communication equipment at \(91,875.
Sep. 1 Sold a building that cost \)520,000 (accumulated depreciation of \(285,000 through December 31 of the preceding year). Whitney Plumb received \)390,000 cash from the sale of the building. Depreciation is computed on a straight-line basis. The building has a 40-year useful life and a residual value of \(25,000.
Dec. 31 Recorded depreciation as follows:
Communication equipment is depreciated by the straight-line method over a five-year life with zero residual value. Office equipment is depreciated using the double-declining-balance method over five years with a \)2,000 residual value.
Record the transactions in the journal of Whitney Plumb Associates.
Computing the asset turnover ratio Biagas, Inc. had net sales of \(55,600,000 for the year ended May 31, 2018. Its beginning and ending total assets were \)52,800,000 and $98,500,000, respectively. Determine Biagas鈥檚 asset turnover ratio for year ended May 31, 2018.
Question: What is a lump-sum purchase, and how is it accounted for?
Accounting for goodwill
Decca Publishing paid \(230,000 to acquire Thrifty Nickel, a weekly advertising paper. At the time of the acquisition, Thrifty Nickel鈥檚 balance sheet reported total assets of \)130,000 and liabilities of \(70,000. The fair market value of Thrifty Nickel鈥檚 assets was \)100,000. The fair market value of Thrifty Nickel鈥檚 liabilities was $70,000.
Requirements
What is the process by which businesses spread the allocation of an intangible asset鈥檚 cost over its useful life?
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