 Hello and welcome to the session in which we would look at the concept of goodwill. This concept is important if you are studying for the CPA exam or if you are taking advanced accounting course because when you learn about consolidation for the CPA exam, goodwill is part of this process. Understanding how goodwill is computed and accounted for separately is important before you get into the whole consolidation process. So in this session, I hope I'll be able to explain how goodwill is created. How do we compute goodwill? How do we put goodwill on the books? And how do we use this information for further combining financial statements? So before we start, I would like to remind you whether you are an accounting student or a CPA candidate to take a look at my website farhatlectures.com. I don't replace your CPA review course. If you're studying for your CPA exam, that's great. You can keep it. I am a useful addition. You can add me to your study arsenal. 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So let's take a look at this exercise that's going to illustrate the concept of good will. So Adam Company acquires 100% of Ryan Company's assets and liabilities. And notice here, we're keeping everything simple. We're acquiring 100%, so we don't have to worry about something called the minority interest. Later on, we'll have to worry about this. But for now, we don't have to worry about this or non-controlling interest. That's why we're assuming 100%. And that happened on January 1st, 2023. Then Adam dissolves Ryan's company. And here we have Ryan's company book value and Ryan's company fear value. And we're going to learn how to create goodwill and how to book goodwill after we purchase the company. Under the first scenario, we're going to assume for the purpose of illustration that we paid that Adam paid $150,000 for this company. Well, if that's the case, if Adam paid $150,000, we have to find out how much is the company worth. Well, how much is the company worth? We have to look at fear value. Their current assets, book value and fear value are the same. Building, they have a building worth $90,000 on the books. It seems it lost some value. Land, it has more value. They have a trademark on the books. It's worth nothing. But the fair value of it is $30,000. Most likely they created this trademark themselves. They have a goodwill of $15,000. Clearly there is no, we don't care about the fair value of the goodwill for our computation. Liabilities are 40 and 40 and they have common stock of 110 and retained earnings of 25, which is their equity is 135. Now what we need to do, we need to compute, if this find out whether we have a goodwill or not. How do we find out whether if we have a goodwill or not? Well, we have to find out how much we paid. We paid $150,000. That's how much we paid. Consideration transfer, this is consideration transfer. This is how much we paid. We're going to have to compare this to the fair value of the net identifiable asset. What's the fair value of the net identifiable asset? First, we're working with fear value, not book value. Net asset is assets minus liabilities. Well, let's take a look. We have assets of 60, 50, that's 110, 20, 130 and 30, 160. So if we have 160,000 of fair value of assets and we have liabilities of 40,000, therefore what we can say the identifiable net asset, what we could identify because notice the trademark was not identifiable is 120,000. So we paid 120 for the net identifiable asset of 120. What does that mean? It means we pay extra $30,000 extra for assets that we did not identify. Remember the 20,000 are net identifiable asset. So let me highlight this in yellow. That's net identifiable asset, the 120. Now let's look at the journal entry. What a journal entry are we going to do? Are we going to prepare to book this entry? Well, we're transferring their assets and their liabilities and it's everything that's transferred at fair value. Therefore, their current assets are 60,000. We debit current assets. This is the debit column. We debit building 50,000. We debit land 20,000. We debit trademark of 30,000. Now we also debit goodwill of 30,000. Now we have to credit our liabilities. Since we purchased the liabilities, we credit the liabilities 40,000. And for this example, we paid 150,000. Always double check. Make sure your debits, 190, your credits should equal to your debit. So this is 60, 110, 130 plus 60 is 190 as well. This is how much we paid 150,000. Now let's change the scenario a bit and assume we paid, rather than 150, we're going to assume we paid 100 and for this company, we got it at a discount 100. Let's make it 110, 110,000. Well the same thing. We're going to have to compute the same. We have to go through the same computation in a sense that we have to find out if we have any goodwill. Well we paid 100,000, 100,000 for a company that's worth 120,000. So we did not change this scenario. All that we change is how much we paid for the company. Well, if we paid 100,000 for something that's worth 20, guess what? We bought this at a bargain. We bought it less than its net identifiable asset. Now we have negative 20,000. What do we call this negative 20,000? We don't call it negative goodwill. Be careful because it used to be called negative goodwill but that's no longer the case. We don't have negative goodwill. What we do is we bought it at a bargain. That's a gain. We have a gain. We have a gain on a bargain purchase. That's basically what happens. Now what would the entry would look like if that's the case? Again, we're going to transfer the current assets at 60,000. We're going to transfer the building at 50, land at 20, trademark at 30. So notice basically the same. Now we don't have goodwill. So we don't have an asset. What do we have? We have a gain on purchase bargain and this is basically an income statement account. It's a gain. It's a credit. It goes on the income statement. We have a liability of 40,000 and we only paid 100,000. Once again, make sure your debits. This is your credits, 170 equal to your debits. This is 110, 130, 160, sorry, this is 170. This is 160 and this is 160. Notice your debits equal to your credits. This is basically how goodwill is created. When is it created? It's when you pay more than the net identifiable asset, the company that you are purchasing. That's when goodwill is created. When one company buys another company, goodwill might be created. Now the other thing you want to know about goodwill, FYI, goodwill will have unlimited life. It means it's not subject to amortization, which is that's very important. It's subject to something called impairment and we learn about impairment in this chapter as well. So that's very important. All this information is important. The building blocks for you, whether you are an accounting student or studying for the CPA exam. Once again, I don't replace your CPA review course. My courses are designed to align with your CPA review course. I am in addition to your CPA review course. I'm a vitamin pill. I'm that supplemental tool. Again, your risk is one month. Your CPA exam is a lifetime investment. Don't shortchange yourself. Why? Because you're going to invest money now and it's going to pay dividend for the next 20, 30, 40 years. Get it done. Use all your resources. My resources are not expensive. It's very much affordable. At least your risk is very limited. $30. Anyhow, good luck, study hard and of course, stay safe. The CPA exam is worth.