What is goodwill in accounting?

3. Example of goodwill recognition and accounting

Let’s look at an example of a simplified business combination to see how goodwill can be calculated.

Company Seller decided to sell one of its subsidiaries, Subsidiary ABC. Company Buyer is the purchaser of this subsidiary.

The selling price for Subsidiary ABC is $20,000,000.

Company Buyer performed a valuation analysis of Subsidiary’s ABC assets acquired and liabilities assumed and determined the following fair values:

 

Description

Fair Value

Asset

Inventory

$ 4,500,000

Asset

Accounts Receivable

3,300,000

Asset

Prepaid Assets

$600,000

Asset

Property, Plant & Equipment

8,900,000

Asset

Customer Lists

800,000

Asset

Non-compete Agreements

300,000

Asset

Other Long-term Assets

550,000

Liability

Accrued Liabilities

1,250,000

Liability

Accounts Payable

2,850,000

Liability

Other Liabilities

200,000

Net Assets *

14,650,000

* Net assets were determined by subtracting total liabilities assumed from total assets acquired.

The amount of goodwill in this case can be calculated as follows:

Goodwill = Purchase Price – Net Assets Acquired

Goodwill = $20,000,000 – $14,650,000 = $5,350,000

The journal entry to record Subsidiary ABC’s assets, liabilities and goodwill on Company Buyer’s books will be as follows:

Account Titles

Debit

Credit

Inventory

4,500,000

 

Accounts Receivable

3,300,000

 

Prepaid Assets

600,000

 

Property, Plant & Equipment

8,900,000

 

Customer Lists

800,000

 

Non-compete Agreements

300,000

 

Other Long-term Assets

550,000

 

Goodwill

5,350,000

 

     Cash

 

20,000,000

     Accrued Liabilities

 

1,250,000

     Accounts Payable

 

2,850,000

     Other Liabilities

 

200,000

The description of goodwill and its recognition in this article has been simplified to make understanding of this topic easier. However, this topic is more complex and has a lot of peculiarities. Keep this in mind when you account for goodwill in your records.

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