Page 468 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

An ethical perspective:
ABC corporation

In 2010, prior to the tax law change permitting the amortization of goodwill for tax purposes, ABC
Corporation acquired XYZ Company for USD 10,000,000 cash. ABC acquired the following assets:

Accounts receivable $80,000
Old Book Fair Market
Value Value
Merchandise inventory $ 200,000 $ 300,000
Buildings 3,000,000 4,000,000
Land 1,000,000 3,000,000
Equipment 500,000 700,000

An experienced appraiser with an excellent reputation established the fair market value of the
assets. ABC also assumed the liability for paying XYZ's USD 50,000 of accounts payable.
John Gilbert, ABC's accountant, prepared the following journal entry to record the purchase: In

explaining the entry to ABC's president, Gilbert said that the assets had to be recorded at their fair
market values. He also stated that the goodwill could not be amortized for accounting purposes or
tax purposes.

Accounts Receivable 80,000
(+A)
Merchandise Inventory 300,000
(+A)
Buildings (+A) 4,000,000
Land (+A) 3,000,000
Equipment (+A) 700,000
Goodwill (+A) 1,970,000
Accounts Payable (+L) 50,000
Cash (-A) 10,000,000
To record the
purchase of XYZ
Company.

The president reacted with, "It is not fair that we are prohibited from amortizing goodwill when it is

a part of the cost of the purchase. Besides, appraisals are very inexact, and maybe some of our other
assets are worth more than the one appraiser indicated. I want you to reduce goodwill down to USD
470,000 and assign the other USD 1,500,000 to the buildings and equipment. Then, we can benefit
from the depreciation on these assets. If I need to find an appraiser who will support the new
allocations, I will."
When Gilbert protested, the president stated, "If you are going to have a future with us, you need to
be a team player. We just cannot afford to lose those tax deductions." Gilbert feared that if he did
not go along, he would soon be unemployed.

Accounting Principles: A Business Perspective 469 A Global Text