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Chapter 9: Q13SE (page 528)

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

Short Answer

Expert verified

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

Step by step solution

01

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.

02

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

03

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 )

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Most popular questions from this chapter

Whitney Plumb Associates surveys American eating habits. The company’s 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.

What does it mean if an exchange of plant assets has commercial substance? Are gains and losses recorded on the books because of the exchange?

Define property, plant, and equipment. Provide some examples.

Question:Western Bank & Trust purchased land and a building for the lump sum of $3,000,000. To get the maximum tax deduction, Western allocated 90% of the purchase price to the building and only 10% to the land. A more realistic allocation would have been 70% to the building and 30% to the land.

Requirements

1. Explain the tax advantage of allocating too much to the building and too little to the land.

2. Was Western’s allocation ethical? If so, state why. If not, why not? Identify who was harmed.

Western Bank & Trust purchased land and a building for the lump sum of $3,000,000. To get the maximum tax deduction, Western allocated 90% of the purchase price to the building and only 10% to the land. A more realistic allocation would have been 70% to the building and 30% to the land.

Requirements

1. Explain the tax advantage of allocating too much to the building and too little to the land.

2. Was Western’s allocation ethical? If so, state why. If not, why not? Identify who was harmed.
See all solutions

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