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Goodwill
Goodwill is an intangible asset related to the acquisition of one company by another. It represents the portion of the purchase price that exceeds the fair value of the company being acquired.
Why pay more than fair value?
- Fair value is made up of assets and liabilities
- Goodwill represents the intangible value of the company
- Brand name
- Customer base
- Customer relations
- Employee relations
- Proprietary technology
Journalizing an Acquisition
- Debit assets acquired
- Debit goodwill
- Credit liabilities acquired
- Credit payments
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Example: Goodwill
ABC Inc. purchased XYZ Corp. in for $10 million. The market value of XYZ Corp's assets totalled $13 million and the market value of its liabilities at the time of the sale was $5 million. How much goodwill should be debited in ABC Inc's books?
Example: Goodwill
On January 17th, Wize Corp. acquired a competitor on the east cost for $4 million, half in cash and the rest in shares of the company. The competitor's assets had the following market values:
- Accounts receivable: $600,000
- Inventory: $1,200,000
- Property, Plant & Equipment: $3,500,000
- Intangible assets: $900,000
The company also acquired the following liabilities in the transaction:
- Accounts payable: $450,000
- Salaries payable: $11,000
- Long-term Bank loans: $2,400,000
Prepare the journal entry to record the purchase.
Practice: Goodwill
JK Limited recently acquired its largest competitor, KG Corp for $50 million. The company had an appraiser determine the market value of its acquisition, and it was determined that KG Corp's assets had a market value of $80 million and its liabilities had a market value of $40 million. If JK Limited paid $30 million in cash and $20 million in shares to purchase KG Corp, how much goodwill was purchased in the transaction?
Practice: Goodwill
Prepare the journal entry to record the following acquisition:
Tesla Inc. acquires up and coming electric vehicle manufacturer, Zing! Inc. which had the following assets and liabilities (market value):
Tesla Inc. paid $260,000 in cash to acquire Zing! Inc.
Transactions:
| Account | Debit | Credit |
|---|---|---|