Definition of goodwill on financial Statements

Recording Goodwill on the books  November 29, 2005 – 05:24 pm
At one time, goodwill was

Have you ever seen “Goodwill” as an asset category on a set of financial statements? Do you wonder how the dollar amount was arrived at? Did you know that the only way Goodwill can be entered on the balance sheet is through a purchase?

For a definition and general understanding of Goodwill, be sure to read my blog article titled, “Valuing Goodwill: Avoid buying a Pig-in-a-Poke”. Let’s assume you’ve done that and you now know that Goodwill is the difference between the value of a business enterprise as a whole and the sum of the current fair values of its identifiable tangible and intangible net assets.

Let’s also assume that you have just purchased a sole proprietorship small business for $150, 000. You paid for it by making a down payment of $50, 000 from personal funds and acquired a bank loan for the remaining $100, 000. The purchase consists of $70, 000 in Fixed Assets, and $80, 000 in Goodwill. The journal entry would be:

Account Debit Credit

Fixed Assets $70, 000

Goodwill $80, 000

Notes Payable $100, 000

Source: Real Life Accounting Blog

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