Have you ever seen “Goodwill” as an asset category on a set of financial statements? Do you wonder how the dollar amount was arrived at? Did you know that the only way Goodwill can be entered on the balance sheet is through a purchase?
For a definition and general understanding of Goodwill, be sure to read my blog article titled, “Valuing Goodwill: Avoid buying a Pig-in-a-Poke”. Let’s assume you’ve done that and you now know that Goodwill is the difference between the value of a business enterprise as a whole and the sum of the current fair values of its identifiable tangible and intangible net assets.
Let’s also assume that you have just purchased a sole proprietorship small business for $150,000. You paid for it by making a down payment of $50,000 from personal funds and acquired a bank loan for the remaining $100,000. The purchase consists of $70,000 in Fixed Assets, and $80,000 in Goodwill. The journal entry would be:
Account Debit Credit
Fixed Assets $70,000
Goodwill $80,000
Notes Payable $100,000
Capital Contributions $ 50,000
You know you can depreciate the Fixed Assets, but can you write off Goodwill? According to the Internal Revenue Service, under the MACRS system, Goodwill can be amortized over a fifteen year period.
If you bought the business on July 1, the first year’s amortization would be $2,666.67. Each full year would be $5,333.33. Simply divide $80,000 by 15 to get $5,333.33. Divide that amount by 2 to arrive at $2,666.67. Depending on what month of the year you purchased the business determines the amount amortization expense. The journal entry to record amortization for Goodwill would look like this:
Account Debit Credit
Amortization Expense $2,666.67
Accumulated Amortization $2,666.67
Pretty straightforward, wouldn’t you say?
2 Comments
I’m taking AccountingII online and here is one our questions. I think it’s a trick question.
It describes the acquisition of timber rights and intangible assets during the current year ended December 31:
a. Timber rights on a tract of land were purchased for $648,000 on July 5. The stand of timber is estimated at 3,600,000 board feet. During the current year, 1,200,000 bft of timer were cut and sold.
I got that part done and calculated. Here’s the trick.
b. Goodwill in the amount of $27,000,000 was purchased on January 7.
It wants us to journalize these entries. Our book specifically states that “goodwill is not amortized.”
If the problem doesn’t state anything else, how do we journalize this?
I know I probably won’t receive an answer in time for this assignment, but it’s still bugging me.
Thanks for any help or insight you can provide.
Deb
Debbie: Maybe all they asking is for you to journalize goodwill by debiting goodwill under Other Assets and crediting Cash (or however they bought the goodwill).
John
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