Question

12. Which of the following properly describes the accounting for goodwill?

A. Goodwill is recorded when it is internally generated.

B. Goodwill is amortized over its useful life.

C. Goodwill is the difference between the amount paid for a company relative to the book value of the acquired company's net assets.

D. Goodwill is written down when it has been determined to be impaired.

I want the answer plus a short explanation on why the choice is correct/wrong for each option , thank you very much in advance !

Answer 1

A. WRONG , Beacuse from an accounting standpoint, goodwill is internally generated is not recorded as an asset unless it is purchased during the acquisition of another company. The purchase of goodwill occurs when one company buys another company for an amount greater than the total value of the company's net assets.

B. WRONG ,goodwill is never amortized, because it is considered to have an indefinite useful life.

C. CORRECT ,When a company buys another firm, anything it pays above and beyond the net value of the target's identifiable assets becomes goodwill on the balance sheet.

D. CORRECT ,Goodwill impairment occurs when a company decides to pay more than book value for the acquisition of an asset, and then the value of that asset declines.The company has to adjust the book value of that goodwill down if it becomes impaired.

Hope this helped, have great day happy studying.