FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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On January 1, 2020, Azure Corporation purchased Sparrow Corporation for $20 million. Of the $20 million purchase price, $2 million was allocated to
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Introduction
Goodwill:
It is an intangible asset and represents a business reputation. It is recognized when a business purchases another business. It represents the excess cost paid by the purchasing business to the purchased business over the fair value of the purchase business net assets. Goodwill is considered to have an indefinite useful life.
For example, ABC company purchases PQR company for $10,000. The fair value of PQR's net assets (Assets - Liabilities) was $8,500 at the time of purchase. Here, the goodwill is the difference between the cost paid by ABC Company and the fair value of assets of PQR, which amounts to $1,500 ($10,000 - $8,500).
Amortization Expenses:
Amortization Expense is the same as depreciation expense. It applies to intangible assets. It is a process of charging the cost of an intangible asset as expense over its useful life. It represents the periodic allocation of cost as expenses. It reduces the carrying amount of the intangible asset. It applies only to those intangible assets that have a finite useful life.
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