Which of the following methods is NOT a valid method of accounting for goodwill? A) Fully deducted against equity immediately. B) Subject to a monthly impairment test. C) Amortized over a specified period of time. The correct answer was B) Subject to a monthly impairment test. The impairment test is annual, not monthly. Both remaining methods are possible, including not amortizing goodwill if it can be reasonably shown that goodwill has not lost its value (i.e. revenue-generating ability). ----------------------------- According to my background in accounting & finance, goodwill is subject to impairment AT LEAST annually, capitalized and amortized. When is goodwill “Fully deducted against equity immediately?”
Goodwill is recorded on the Balance sheet due to applying the Purchase method to acquisitions. It has no value when separated from the firm. So Goodwill should be eliminated by reducing assets, and removing from Shareholder’s equity for analytical purposes. Chapter 27 - Financial Synthesis.
CP, you are right but you are referring to the financial analysis of the balance sheet. The question is specific to the accounting treatment of goodwill. As for pacmandefense, I pulled out my accounting textbook and here are my direct quotes from Intermediate Accounting, volume 1 by Kieso: “Goodwill is required to be tested for impairment on an annual basis” And two methods of accounting for goodwill: “1. Charge goodwill off immediately to shareholders’ equity.” “3. Retain goodwill indefinitely unless a reduction in value occurs” (impairment)
and for some reason I didn’t type #2 of methods of accounting for goodwill: “#2: Amortize goodwill over its useful life”
thanks guys. i guess this settles it. -------------------------------------- Accounting Treatment The treatment of goodwill has changed over the years. Goodwill was first treated as a deduction from the stockholders’ equity section at the acquisition date. Next, capitalization without amortization occurred. Finally, current treatment requires capitalization and amortization. http://www.nysscpa.org/cpajournal/old/14152806.htm