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On May 1, 2015, Zoe Inc. purchased Branta Corp. for $15,000,000 in cash. They only received $12,000,000 in net assets. In 2016, the market value of the goodwill obtained from Branta Corp. was valued at $4,000,000, but in 2017 it dropped to $2,000,000. Prepare the journal entry for the creation of goodwill and the entry to record any impairments to it in subsequent years.

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Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
FindFindarrow_forward

Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
Chapter 11, Problem 11PB
Textbook Problem
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On May 1, 2015, Zoe Inc. purchased Branta Corp. for $15,000,000 in cash. They only received $12,000,000 in net assets. In 2016, the market value of the goodwill obtained from Branta Corp. was valued at $4,000,000, but in 2017 it dropped to $2,000,000. Prepare the journal entry for the creation of goodwill and the entry to record any impairments to it in subsequent years.

To determine

Introduction:

Goodwill is an intangible asset which is recorded at the time when a company purchases another company for a price higher than the net asset value of the purchased company.

To prepare:

Journal Entries to record goodwill and for the impairment of goodwill in the subsequent years.

Explanation of Solution

Record purchase of business:

Date Account Debit ($) Credit ($)
May 1, 2015 Net Asset 12,000,000
Goodwill 3,000,000
Cash 15,000,000
(To record business purchase.)

Table (1)

  • Net Assetsare assets and it is increased by $12,000,000. Therefore, Net Assetsaredebited with $12,000,000.
  • Goodwill is an asset and it is increased by $3,000,000. Therefore, Goodwill is debited with $3,000,000.
  • Cash is an asset and it is decreased by $15,000,000. Therefore, cash is credited with $15,000,000.

In year 2016, the market value of goodwill is $4,000,000...

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Chapter 11 Solutions

Principles of Accounting Volume 1
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