Answer to Question #208364 in Accounting for ray

Question

The accountant for HHH Ltd, Ms Stephanie, has sought your advice on an accounting issue that has been puzzling her. When preparing the acquisition analysis relating to HHH Ltd’s acquisition of Orton Ltd, she calculated that there was an excess on acquisition of $10,000. Being unsure of how to account for this, she was informed by accounting acquaintances that this should be recognized as income. However, she reasoned that this would have an effect on the consolidated profit in the first year after acquisition date. For example, if Orton Ltd reported a profit of $50,000, then consolidated profits would be $60,000. She is unsure of whether this profit is all post-acquisition profit or a mixture of pre-acquisition profit and post-acquisition profit.

Required:

How should the excess be accounted for? What is the effect of its recognition on subsequent consolidated financial statements?

Answer 1

Solution:

The excess in the acquisition of another company is termed as goodwill. It should be accounted for in the balance sheet as an intangible asset under a non-current asset.

 

Goodwill changes can result in goodwill impairment which will result in a decrease in the goodwill account on the balance sheet. This can also reduce the net income for the year, which can result in a loss on the income statement.