Question

5. Company A buys Company B and pays $5 million more than the fair value of the identifiable assets and liabilities. The $5 million was recorded as Goodwill. Which of the following statements is true? A. Goodwill is amortized to expense over 40 years. C B. The rules have changed so that goodwill is now expensed immediately C. Goodwill must be checked for impairment periodically and reduced if impaired. D. Goodwill is amortized over an appropriate period of 40 years or less.

Answer 1

Answer: Option-(C): Goodwill must be checked for impairment periodically and reduced if impaired. Reason: When a firm acquires an existing business firm as result of its business strategy, the acquiring firm must pay purchase consideration to the firm that is being acquired. The acquiring firm shall value the assets and liabilities of the acquired firm and compare the same with book value of assets and liabilities acquired. Difference betweeen assets and liabilities valued at the time of acquisition is the net worth of the acquired firm and the difference between purchase price paid and networth of the acquired firm is the goodwill. It is manadated to value the goodwill recorded by the acquiring firm periodically and adjust its carrying value when there is a decrease in carrying value of the goodwill. It is called impairment loss which shall be recorded as an expenditure in the firm's accounting records by creating an allowance for the same. Therefore, option-(c) is the correct ans