Textbook Problem

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.