Question

Monsecours Corp., a public company incorporated on June 28, 2016, set up a single account for all of its intangible assets. The following summary discloses the debit entries that were recorded during 2016 and 2017 in that account:

INTANGIBLE ASSETS-MONSECOURS
July	1,	2016		8-year franchise; expiration date of June 30, 2024		$35,000
Oct.	1			Advance payment on leasehold (2-year lease)		25,000
Dec.	31			Net loss for 2016 including incorporation fee, $1,000; related legal fees of organizing, $5,000; expenses of recruiting and training staff for start-up of new business, $3,800		17,000
Feb.	15,	2017		Patent purchased (10-year life)		65,400
Mar.	1			Direct costs of acquiring a 5-year licensing agreement		86,000
Apr.	1			Goodwill purchased (indefinite life)		287,500
June	1			Legal fee for successful defence of patent (see above)		13,350
Dec.	31			Costs of research department for year		75,000
	31			Royalties paid under licensing agreement (see above)		2,775

The new business started up on July 2, 2016. No amortization was recorded for 2016 or 2017. The goodwill purchased on April 1, 2017, includes in-process development costs that meet the six development stage criteria, valued at $175,000. The company estimates that this amount will help it generate revenues over a 10-year period.

(b)

In what circumstances should goodwill be recognized? From the perspective of an investor, does the required recognition and measurement of goodwill provide useful financial statement information?

Answer 1

Goodwill must be recognised only when it is purchased from outside. Purchased goodwill usually arises during mergers or acquisitons of assets and liabilities and is the difference between the take over price and the fair value of the asset.

Internally generated goodwill usually the name/ fame that a company generates or its product generate must never be recorded as it is difficult to estimate the appropriate value with reliability.

Purchased goodwill helps investors understand the difference between the purchase price and the fair value of the assets. Also, it presents the value of intangible assets that a company has in comparison to total assets. It helps them estimate the impairment that the goodwill may have over a period of time and the actual worth of the company minus the goodwill.