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    Self Generated Goodwill not recorded

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    Accounting for market values. Mrs. Rosewood recently approached her bank manager and requested a loan for her business, Flowers Ltd. After viewing Flowers' financial information, the bank manager made the following estimates concerning Flowers, Ltd:

    Unrecorded Goodwill $300,000
    The market value of inventories, capital assets, and temporary investments is $125,000

    Mrs Rosewood always likes to maintain a positive outlook and thought it would be desirable to include these estimates in Flowers' financial statements. When Mrs. Rosewood asked her accountant to make the appropriate changes, he refused claiming, "I can't possibly do that. Generally accepted accounting principles do not allow me to record all assets and I certainly can't record goodwill. Furthermore, those assets you mention shouldn't be valued at market value.

    Mrs Rosewood was concerned about these remarks and discussed them with a friend. Her friend added to the confusion by stating that he had seen goodwill on balance sheets and had seen temporary investments carried at market value.

    Required:

    Prepare an explanation of the accountant's comments for Mrs Rosewood. Be sure to discss any accounting conventions or assumptions that support the accountant's position. You may also use examples to help explain the situation to Mrs. Rosewood. Include an explanation of Mrs. Rosewood's friend's comments.

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    Solution Preview

    There are two issues - unrecorded goodwill and market value. The acountant is right is saying that they cannot be recorded. As far as market value is concerned, inventories and capital assets are to be recorded at cost or market value whichever is lower. This comes from the cost concept which states that non monetary assets such as land, buildings, machinery should be recorded at the price paid to acquire it - the cost. It provides a relatively objective foundation for non-monetary asset accounting, since it would ...

    Solution Summary

    The solution explains the cost concept for recording assets and why self generated goodwill will not appear in the balance sheet

    $2.49

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