Purchased Goodwill Notes

WHAT IS PURCHASED GOODWILL?

  • Goodwill: An intangible asset that arises when one company acquires another company.
  • Purchased Goodwill: The excess amount paid over the fair market value of the acquired company's net assets.
  • Net Assets: The total of tangible assets, intangible assets, other assets, current liabilities, and long-term liabilities.

PURCHASED GOODWILL CALCULATION

  • Formula for Purchased Goodwill:

    ext{Purchased Goodwill} = ext{Purchase Price} - ( ext{Total Tangible Assets} + ext{Total Intangible Assets} + ext{Other Assets} - ext{Current Liabilities} - ext{Long-term Liabilities})
  • All values must be assessed based on their fair market value.
  • Example Calculation:

    ext{Goodwill} = ext{Purchase Price} - ( ext{Cash} + ext{Land} + ext{Building} + ext{Inventory} + ext{Accounts Receivable} + ext{Notes Receivable} + ext{Trademark(s)} + ext{Copyright(s)} - ext{Accounts Payable} - ext{Notes Payable})
  • Important: Do not include equity accounts in this calculation.

PURCHASED GOODWILL RECORDING

Part 1: Initial Values
  • Example from Trevor Company:
    • Purchase Price: $790,000
    • Book and Fair Values of Assets:
    • Cash:
      • Book Value: $75,000.00
      • Fair Value: $75,000.00
    • Accounts Receivable:
      • Book Value: $180,000.00
      • Fair Value: $180,000.00
    • Inventory:
      • Book Value: $150,000.00
      • Fair Value: $210,000.00
    • Property, Plant, & Equipment:
      • Book Value: $270,000.00
      • Fair Value: $325,000.00
    • Trademark:
      • Book Value: $0.00
      • Fair Value: $130,000.00
    • Notes Payable:
      • Book Value: $(530,000.00)
      • Fair Value: $(530,000.00)
  • Identifiable Net Assets Calculated:


ext{Identifiable Net Assets} = ext{Fair Value Total} = 390,000.00

Part 2: Calculation of Goodwill
  • Reiterating the Calculation:


ext{Goodwill} = ext{Purchase Price} - ext{Fair Value of Identifiable Assets}

  • Applying Values:


ext{Goodwill} = 790,000 - 390,000 = 400,000

Part 3: Journal Entry Example

  • Journal Entry for Trevor Company after Goodwill has been derived:

    • Debit Entries:
    • Cash: $75,000.00
    • Accounts Receivable: $180,000.00
    • Inventory: $210,000.00
    • Property, Plant, & Equipment: $325,000.00
    • Trademark: $130,000.00
    • Goodwill: $400,000.00
    • Credit Entry:
    • Notes Payable: $530,000.00
    • Total Cash: $790,000.00

  • This entry recognizes the acquisition of assets and the establishment of goodwill on the balance sheet.