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On the day a company was sold it showed total assets of $5,300,000 and liabilities of $2,100,000. If the purchaser paid $3,500,000 for the company,

REQUIRED

a) How much would the purchaser record as goodwill?

b) Define intangible assets and explain the three critical attributes of an intangible asset.

1 answer

To address your questions, let's analyze the information provided.

a) Calculation of Goodwill

Goodwill represents the excess amount paid by a purchaser over the fair value of the identifiable net assets of a company. Goodwill can be calculated using the following formula:

\[ \text{Goodwill} = \text{Purchase Price} - \text{Fair Value of Net Assets} \]

  1. Calculate Fair Value of Net Assets: \[ \text{Fair Value of Net Assets} = \text{Total Assets} - \text{Total Liabilities} \] \[ \text{Fair Value of Net Assets} = $5,300,000 - $2,100,000 = $3,200,000 \]

  2. Calculate Goodwill: \[ \text{Goodwill} = \text{Purchase Price} - \text{Fair Value of Net Assets} \] \[ \text{Goodwill} = $3,500,000 - $3,200,000 = $300,000 \]

Thus, the purchaser would record $300,000 as goodwill.

b) Definition of Intangible Assets and Their Attributes

Definition of Intangible Assets: Intangible assets are non-physical assets that represent rights or privileges accrued by a company. These assets can provide future economic benefits and are not material in nature; they cannot be touched or physically measured.

Three Critical Attributes of an Intangible Asset:

  1. Identifiability:

    • An intangible asset must be identifiable, meaning it can either be separable (capable of being sold or licensed independently) or arise from contractual or other legal rights. This attribute allows the organization to measure and assign a value to the asset.

  2. Control:

    • The company must have the power to obtain the future economic benefits flowing from the intangible asset and to restrict others from accessing those benefits. This control is often attributable to legal rights, such as patents, trademarks, and copyrights.

  3. Future Economic Benefits:

    • Intangible assets must be expected to generate future economic benefits for the company. This could manifest in various forms, such as increased revenues, cost savings, or enhanced productivity, that can contribute positively to the company's cash flows or profits.

By possessing these attributes, intangible assets can add significant value to a company's overall worth and its competitive advantage in the marketplace.