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Alpha purchased Beta for S25,000. Beta's net identifiable assets were valued at S20,000. Calculate the goodwill and explain how Alpha should amortize it.

Accounting

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Answer

a

S5,000\text{S}5,000

Step-by-step solution

4 steps

Here are the calculations and explanations for the goodwill:

Part a· 4 steps

Calculate the goodwill paid by Alpha on the purchase of Beta's business.

  1. Calculate the total identifiable assets of Beta.

    Total Assets=Equipment+Stock+Debtors+Bank\text{Total Assets} = \text{Equipment} + \text{Stock} + \text{Debtors} + \text{Bank} Total Assets=S9,300+S4,100+S5,300+S3,200\text{Total Assets} = \text{S}9,300 + \text{S}4,100 + \text{S}5,300 + \text{S}3,200 Total Assets=S21,900\text{Total Assets} = \text{S}21,900

  2. Identify the total liabilities of Beta.

    Total Liabilities=Creditors=S1,900\text{Total Liabilities} = \text{Creditors} = \text{S}1,900

  3. Calculate the net identifiable assets of Beta.

    Net Identifiable Assets=Total Assets−Total Liabilities\text{Net Identifiable Assets} = \text{Total Assets} - \text{Total Liabilities} Net Identifiable Assets=S21,900−S1,900\text{Net Identifiable Assets} = \text{S}21,900 - \text{S}1,900 Net Identifiable Assets=S20,000\text{Net Identifiable Assets} = \text{S}20,000

  4. Calculate the goodwill.

    Goodwill is the excess of the purchase price over the fair value of net identifiable assets acquired.

    Goodwill=Purchase Price−Net Identifiable Assets\text{Goodwill} = \text{Purchase Price} - \text{Net Identifiable Assets} Goodwill=S25,000−S20,000\text{Goodwill} = \text{S}25,000 - \text{S}20,000 Goodwill=S5,000\text{Goodwill} = \text{S}5,000

    The goodwill paid by Alpha is S5,000\boxed{\text{S}5,000}.

Part b

How should Alpha amortize this goodwill?

Under current accounting standards (such as IFRS and US GAAP), goodwill is not amortized. Instead, it is subject to an annual impairment test. If the carrying amount of the goodwill exceeds its recoverable amount (the higher of its fair value less costs to sell and its value in use), an impairment loss must be recognized, reducing the goodwill's value on the balance sheet.

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