Goodwill is an intangible asset representing the excess value paid by a company when acquiring another business, over and above the fair value of the identifiable net assets. Goodwill is also recorded on the acquiring company’s balance sheet when the purchase price exceeds the fair market value of the acquired assets and liabilities.
Example Journal Entry for Goodwill
Let’s assume Company A acquires Company B of $500,000. The fair value of Company B’s identifiable net assets (assets minus liabilities) is $400,000. Therefore, the goodwill would be the excess amount of $100,000 ($500,000 – $400,000).
Here’s how the journal entry would be recorded:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Assets (e.g., Inventory, Equipment) A/c Debit | 400,000 | |
| 09/06/2024 | Goodwill A/c Debit | 100,000 | |
| 09/06/2024 | To Cash (or Bank) A/c | 500,000 |
Explanation:
- Assets (e.g., inventory, equipment, etc.) are debited for the fair value of $400,000.
- Goodwill will debit $100,000 to reflect the amount paid over and above the fair value of net assets.
- Cash (or bank) will be credited $500,000 purchase price.
This journal entry shows the acquisition of identifiable assets (e.g., inventory, equipment) and the recognition that goodwill is an intangible asset on the balance sheet.
Amortization or Impairment of Goodwill
Goodwill is not amortized but is tested annually for impairment. If an impairment loss occurs (i.e., if the goodwill is determined to be overvalued and must be written down), the journal entry would be:
Let’s assume, that after the impairment test, $20,000 of the goodwill is found to be impaired.
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Impairment Loss (P&L) A/c Debit | 20,000 | |
| 09/06/2024 | To Goodwill A/c | 20,000 |
Explanation:
- Impairment Loss will be debited $20,000, reducing the company’s profit.
- Goodwill will be credited $20,000, reducing the carrying value of goodwill on the balance sheet.
This accounting treatment applies when a company acquires another and pays more than the fair value of the net identifiable assets. The goodwill is recognized as an intangible asset.