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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Elson Corporation, a retail fuel oil distributor, has increased its annual sales volume to a level three times greater than the annual sales of a dealer it purchased in 2015 in order to begin operations.

The board of directors recently received an offer to negotiate the sale of Elson to a large competitor. As a result, the majority of the board wants to increase the stated value of goodwill on the balance sheet to reflect the larger sales volume developed through intensive promotion and the current market price of fuel oil. A few of the board members, however, would prefer to eliminate goodwill altogether from the balance sheet in order to prevent “possible misinterpretations.” Goodwill was recorded properly in 2015.

Required:

  1. 1. Explain the meaning of the term goodwill.
  2. 2. Explain why the book and fair values of the goodwill of Elson may differ.
  3. 3. Discuss the propriety of (a) increasing the stated value of goodwill prior to the negotiations and (b) eliminating goodwill completely from the balance sheet prior to negotiations.

1.

To determine

Explain the meaning of goodwill.

Explanation

Goodwill: Goodwill is the good reputation developed by a company over years. This is recorded as an intangible asset, and is quantified when other company acquires. Goodwill should be recorded only when one company is acquired by another company. Goodwill value would be impaired, if the book value of goodwill is less than fair market value.

The internally developed goodwill should be expensed only when the costs are incurred...

2.

To determine

State the reason behind the difference between the book and fair values of the goodwill of Company E.

3.

To determine

Explain the given propriety:

(a) Increasing the stated value of goodwill prior to the negotiations, and

(b) Eliminating goodwill completely from the balance sheet prior to negotiations.

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