Question

Describe in words how goodwill is accounted for using the equity method of accounting. How does this differ to accounting for goodwill using the consolidation method of accounting?

Answer 1

1. Equity method:

Calcuation of goodwill = Purchase price - Proportionate value of book value of the firm acquired

At the acquisition date, the purchase price is determined. The excess value of purchase price, over the proportionate book value of the assets acquired 'less' liabilities assumed is allocated to goodwill.

2. Consolidation method:

Consolidated goodwill = Consideration paid for acquiring the company + noncontrolling interest – fair value of the company's net identifiable assets

At the acquisition date, consideration is determined. Non controlling interest i.e. the portion of the company not invested in, is calculated.

The same is subtracted by the Fair value of the assets taken over 'less' liabilities assumed