Page 465 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

Although leaseholds are intangible assets, leaseholds and leasehold improvements sometimes appear in the
property, plant, and equipment section of the balance sheet.
In accounting, goodwill is an intangible value attached to a company resulting mainly from the company's

management skill or know-how and a favorable reputation with customers. A company's value may be greater than
the total of the fair market value of its tangible and identifiable intangible assets. This greater value means that the
company generates an above-average income on each dollar invested in the business. Thus, proof of a company's
goodwill is its ability to generate superior earnings or income.
A goodwill account appears in the accounting records only if goodwill has been purchased. A company cannot
purchase goodwill by itself; it must buy an entire business or a part of a business to obtain the accompanying
intangible asset, goodwill.

To illustrate, assume that Lenox Company purchased all of Martin Company's assets for USD 700,000. Lenox
also agreed to assume responsibility for a USD 350,000 mortgage note payable owed by Martin. Goodwill is the
difference between the amount paid for the business including the debt assumed (USD 700,000 + USD 350,000 =
USD 1,050,000) and the fair market value of the assets purchased. Notice that Lenox would use the fair market
value of the assets rather than book value to determine the amount of goodwill. The following computation is for
the goodwill purchased by Lenox:
Cash paid $ 700,000
Mortgage note payable 350,000
Total price paid $1,050,000
Less fair market values of
individually
identifiable assets:
Accounts receivable $ 95,000
Merchandise inventory 100,000
Land 240,000
Buildings 275,000
Equipment 200,000
Patents 65,000 975,000
Goodwill $ 75,000
The USD 75,000 is the goodwill Lenox records as an intangible asset; it records all of the other assets at their
fair market values, and the liability at the amount due.

Accounting Principles: A Business Perspective 466 A Global Text