Echo Corp., a retail propane gas distributor, has increased its annual sales volume to a level that is three times greater than the annual sales of a dealer that it purchased in 2005 in order to begin operations. The board of directors of Echo Corp. recently received an offer to negotiate the sale of the company to a large competitor. As a result, the majority of the board wants to increase the stated value of goodwill on the balance sheet to reflect the larger sales volume that it developed through intensive promotions and the product`s current market price. A few of the board members, however, would prefer to eliminate goodwill from the balance sheet altogether in order to prevent possible misinterpretations. Goodwill was recorded properly in 2005.
a) Discuss the appropriateness of each of the following situations in detail:
1. Increasing the stated value of goodwill prior to the negotiations
2. Eliminating goodwill completely from the balance sheet
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Good will is an intangible asset that appears on a company's balance sheet. It represents the value of all favorable attributes that relate to a company. Unlike assets such as investments and plant assets, which can be sold individually in the marketplace, good will can be identified only with the business as a whole. The amount determined could be very subjective and therefore would not contribute to the reliability of financial statements. Therefore, companies record goodwill only when an entire business is purchased. In that case, goodwill is the excess of cost over the fair market value of the net assets or assets less liabilities acquired. It is important to mention that goodwill is recorded only by a company that purchases another company. An outstanding reputation may create goodwill for a company, but that company never records goodwill for its own business. Instead, goodwill is recorded only by the acquiring entity when it buys another ...
This solution provides the student with detail information about goodwill in order to discuss the appropriateness of each of the following situations posted in a problem.
Should the board of directors
1. Increasing the stated value of goodwill prior to negotiations to sell the company to a large competitor.
2. Eliminating goodwill completely from the balance sheet altogether in order to prevent possible misinterpretations.
The solution contains over 600 words.