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Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition by Donald E. Kieso, Paul D. Kimmel, Jerry J. Weygandt

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EXERCISE 9-9

Purpose: (L.O. 6) This exercise illustrates the steps in estimating the value of goodwill.

Mr. Judski is contemplating the sale of his business, Classic Vettes. The following data are available.

Book value of tangible & identifiable intangible assets less liabilities $135,000
Fair market value of tangible & identifiable intangible assets less liabilities 200,000
Estimated fair market value of the business as a whole 240,000

Instructions

  1. Compute the estimated value of goodwill.
  2. Assume Tom Benyon Enterprises purchases the business for $240,000 cash. Explain how Tom Benyon Enterprises should account for the goodwill at the purchase date and in the future as well as the reasons why.

TIP: Companies record goodwill only when an entire business is purchased (that is, what some people call “internally generated” goodwill cannot be recorded). When an entire business is purchased, goodwill is the excess of cost over the fair market value of the net identifiable assets acquired. Net identifiable assets are determined by deducting total liabilities from total identifiable (tangible and intangible) assets.

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