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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