What is goodwill? What is a bargain purchase?

Short Answer

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Goodwill is also defined as the intrinsic value that a business has acquired above and beyond the value of its net assets. It could be due to the personality of those conducting it, the nature of its location, its reputation, or any other circumstance. Bargain purchase is when the asset acquired's fair value exceeds the cost.

Step by step solution

01

Goodwill

Goodwill should be calculated as the difference between the fair value of the acquisition cost and the fair value of the acquired net assets. This is a quantitative definition, not a mental definition of goodwill.

One or more unidentified intangible and identifiable intangible assets that are not reliably measured are sometimes defined as goodwill. New distribution channels, synergies from integrating sales staff, and a superior management team are examples of factors of goodwill.

02

Bargain Purchase

When the fair worth of the assets acquired exceeds the cost, it is referred to as a bargain buy (or negative goodwill). This circumstance might arise as a result of a market flaw. In this situation, the seller would have been better suited selling the assets separately rather than as a package.

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Most popular questions from this chapter

Use the information provided in IFRS12-8. Assume that the recoverable amount of the division is estimated to be \(750,000. Prepare Waters’ journal entry, if necessary, to record an impairment of the goodwill.

Waters Corporation purchased Johnson Company 3 years ago and at that time recorded goodwill of \)400,000. The Johnson Division’s net assets, including the goodwill, have a carrying amount of \(800,000. The recoverable amount of the division is estimated to be \)1,000,000. Prepare Waters’ journal entry, if necessary, to record impairment of the goodwill.

The following is a list of items that could be included in the intangible assets section of the balance sheet.

1. Investment in a subsidiary company.

2. Timberland.

3. Cost of engineering activity required to advance the design of a product to the manufacturing stage.

4. Lease prepayment (6 months’ rent paid in advance).

5. Cost of equipment obtained.

6. Cost of searching for applications of new research findings.

7. Costs incurred in the formation of a corporation.

8. Operating losses incurred in the start-up of a business.

9. Training costs incurred in start-up of new operation.

10. Purchase cost of a franchise.

11. Goodwill generated internally.

12. Cost of testing in search for product alternatives.

13. Goodwill acquired in the purchase of a business.

14. Cost of developing a patent.

15. Cost of purchasing a patent from an inventor.

16. Legal costs incurred in securing a patent.

17. Unrecovered costs of a successful legal suit to protect the patent.

18. Cost of conceptual formulation of possible product alternatives.

19. Cost of purchasing a copyright.

20. Research and development costs.

21. Long-term receivables.

22. Cost of developing a trademark.

23. Cost of purchasing a trademark.

Instructions:

(a) Indicate which items on the list above would generally be reported as intangible assets in the balance sheet.

(b) Indicate how, if at all, the items not reportable as intangible assets would be reported in the financial statements.

On January 1, 2017, Hi and Lois Company purchased 12% bonds having a maturity value of \(300,000 for \)322,744.44. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Hi and Lois Company uses the effective interest method to allocate unamortized discount or premium. 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 a bond amortization schedule.

(c) Prepare the journal entry to record the interest revenue and the amortization at December 31, 2017.

(d) Prepare the journal entry to record the interestand the amortization at December 31, 2018.

What is the nature of research and development costs?

Columbia Sportswear Company acquired a trademark that is helpful in distinguishing one of its new products. The trademark is renewable every 10 years at minimal cost. All evidence indicates that this trademarked product will generate cash flows for an indefinite period of time. How should this trademark be amortized?

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