Q13SE - Horngren'S Financial And Managerial Accounting

Question

Accounting for goodwill 

Decca Publishing paid \(230,000 to acquire Thrifty Nickel, a weekly advertising paper. At the time of the acquisition, Thrifty Nickel’s balance sheet reported total assets of \)130,000 and liabilities of \(70,000. The fair market value of Thrifty Nickel’s assets was \)100,000. The fair market value of Thrifty Nickel’s liabilities was $70,000.

 Requirements 

1. How much goodwill did Decca Publishing purchase as part of the acquisition of Thrifty Nickel? 
2. Journalize Decca Publishing’s acquisition of Thrifty Nickel

Step-by-Step Solution

Answer

Decca Publishing will report $200,000 as the amount paid for goodwill under the acquisition of Thrifty Nickel.

Step 1: Meaning of Intangible Assets

The assets that increase the value of the business organization even without having any physical existence are known as intangible assets. Goodwill and patents are some of the intangible assets. 

Step 2: Calculation of value of the acquisition of Goodwill of Thrifty Nickel

Particulars	Amount ($)	Amount ($)
Purchase price of acquisition		$230,000
Market Value of Thrifty Nickel’s assets	$100,000
Less: Market Value of Thrifty Nickel’s Liabilities	(70,000)
Market Value of Thrifty Nickel’s Net Assets		30,000
Goodwill		$200,000

Step 3: Statement showing a journal entry

Date	Particulars	Debit ($)	Credit ($)
	Assets	1,00,000
	Goodwill	2,00,000
	Liabilities		70,000
	Cash		2,30,000
	( To record purchase of Thrifty Nickel )