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Chapter 12: 12-14Q (page 637)

In examining financial statements, financial analysts often write off goodwill immediately. Comment on this procedure.

Short Answer

Expert verified

The experts merely indicate that they feel that presenting goodwill on the balance sheet does not offer readers of financial statements any meaningful information.

It's impossible to say if this is accurate, but it's worth noting that it looks counterintuitive to pay for goodwill and then quickly write it off, denying that it has any value.

Step by step solution

01

Meaning of Financial Statements

Financial statements are written records that describe a company's operations and financial performance. Government authorities, accountants, corporations, and others frequently audit financial accounts to verify accuracy and for tax, financing, and investment purposes.

02

Written Down Goodwill

Goodwill can be amortized on a straight-line basis over a period not to exceed 10 years. If at any time, the value declines, as happened rapidly with goodwill related to Autonomy, then an impairment charge is required.

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Most popular questions from this chapter

Where are gains and losses related to cash flow hedges involving anticipated transactions reported?

On January 1, 2017, Dagwood Company purchased at par 6%

bonds having a maturity value of $300,000. They are dated January 1, 2017, and mature January 1, 2022, with interest received

on January 1 of each year. The bonds are classified in the held-to-maturity category.

Instructions

(a) Prepare the journal entry at the date of the bond purchase.

(b) Prepare the journal entry to record the interest revenue on December 31, 2017.

(c) Prepare the journal entry to record the interest received on January 1, 2018.

Research and development activities may include (a) personnel costs, (b) materials and equipment costs, and (c) indirect costs. What is the recommended accounting treatment for these three types of R&D costs?

: As a new intern for the local branch office of a national brokerage firm, you are excited to get an assignment that allows you to use your accounting expertise. Your supervisor provides you with the spreadsheet below, which contains data for the most recent quarter for three companies that the firm has been recommending to its clients as 鈥渂uys.鈥� Each of the companies鈥� returns on assets has outperformed their industry cohorts in the past. But, given recent challenges in their markets, there is concern that the companies may experience operating challenges and lower earnings. (All numbers in millions, except return on assets.)

A

B

C

D

E

Company

Fair Value of Company

Book Value (Net Assets)

Carrying Value of Goodwill

Return on Assets

Sprint Nextel

\(36,361

\)51,271

$30,718

3.5%

Washington Mutual

11,742

23,941

9,062

2.4

E* Trade Financial

1,639

4,104

2,035

5.6

Instructions

  1. The fair value for each of these companies is lower than the corresponding book value. What implications does this have for each company鈥檚 future prospects?
  2. To date, none of these companies has recorded goodwill impairments. Your supervisor suspects that they will need to record impairments in the near future, but he is unsure about the goodwill impairment rules. Is it likely that these companies will recognize impairments? Explain.
  3. Estimate the amount of goodwill impairment for each company and prepare the journal entry to record the impairment. For each company, you may assume that the book value less the carrying value of the goodwill approximates the fair value of the company鈥檚 net assets.
  4. Discuss the effects of your entries in part (c) on your evaluation of these companies based on the return on assets ratio.

Use the information from BE17-5 but assume the stock is nonmarketable. Prepare Fairbanks鈥� journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment, if any.
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