Chapter 9
Long-Term Assets
Useful life of more than one year
Used in the operation of a business
Not intended for resale
Long-term assets might include:
 Equipment
 Vehicles
 Property
 Trademarks
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9–1
Carrying Value
The unexpired cost of an asset
(also called book value)
Unexpired Cost = Cost – Accumulated Depreciation
On the Balance Sheet:
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9–2
Classification of Long-Term Assets and Methods
of Accounting for Them
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9–3
Asset Impairment
When is an asset
deemed impaired?
When a long-term
asset loses some or all
of its potential to
generate revenue
before the end of its
useful life
Asset Impairment
The carrying value of a
long-term asset exceeds
its fair value
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9–4
Acquiring Long-Term Assets
How do companies make the decision to
acquire long-term assets?
Capital Budgeting
Method of Evaluation
Net Present Value Method
Evaluates the purchase
based on the net present
value of acquisition cost, net
annual savings in cash
flows, and disposal price
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© Royalty-Free/Corbis
9–5
Net Present Value Method Illustrated
Apple Computer is considering the purchase of a $100,000 customer
relations software package. Management estimates that the company will
save $40,000 in net cash flows per year for four years, the usual life of the
software. The software should be worth $20,000 at the end of that period.
The interest rate is 10 percent compounded annually.
Cash flows related to the purchase of the computer would be as follows:
Acquisition cost
Net annual savings in cash flows
Disposal price
Net cash flows
20x5
($100,000)
$40,000
20x6
20x7
20x8
$40,000
$40,000
($60,000)
$40,000
$40,000
$40,000
20,000
$60,000
Present value Tables 1 and 2 can now be used to place the
cash flows on a comparable basis.
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9–6
Example of Net Present Value Method
(hwk E4)
Acquisition cost
Net annual savings in cash flows
Disposal price
Net cash flows
Acquisition Cost
20x5
($100,000)
$40,000
20x6
20x7
20x8
$40,000
$40,000
($60,000)
$40,000
$40,000
$40,000
20,000
$60,000
Present Value Factor = 1.0
($100,000)
Net Annual Savings Present Value Factor = 3.17
Cash Flows
Table 2: 4 Periods, 10%
3.170 X $40,000
$126,800
Disposal Price
$13,660
Present Value Factor = 0.683
Table 1: 4 Periods, 10%
0.683 X $20,000
Net Present Value
As long as the net present value is
positive, Apple will earn a return of at
least 10 percent.
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$39,600
The return is greater than 10 percent on
the investment. Based on this analysis,
Apple should purchase the software.
9–7
Financing Long-Term Assets
• Financing
alternatives:
Use cash flow from
operations
Issue common stock
Issue long-term notes
Issue bonds
Investors may investigate
whether a company has
free cash flow to finance
long-term assets.
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© Royalty Free PhotoDisc Collection/ Getty Images
Free cash flow is cash that
remains after deducting funds
committed to operations at
current levels
9–8
The Matching Rule and
Long-Term Assets
When a company purchases an asset, it may choose to
capitalize it, thus deferring an expense to a later period
Favorably impacts profitability for that current period
Management must use ethical judgments when
resolving two issues:
1. How much of the total cost of a long-term asset
should be allocated to expense in the current
period?
2. How much should be retained on the balance sheet
as an asset that will benefit future periods?
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9–9
Long-Term Asset
Accounting Policies
Each company must determine how it will
treat long-term assets:
1. How is the cost of the long-term asset
determined?
2. How should the expired portion of the cost of the
long-term asset be allocated against revenues
over time?
3. How should subsequent expenditures, such as
repairs and additions, be treated?
4. How should disposal of the long-term asset be
recorded?
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9–10
Acquisition Cost of Property, Plant,
and Equipment
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9–11
What Are Expenditures?
(hwk E6)
Payments or obligations to make a future
payment for an asset or for a service
Capital
Expenditure
Expenditure for the
purchase or
expansion of a longterm asset
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Revenue
Expenditure
Expenditure for the
repair, maintenance,
and operation of a
long-term asset
9–12
Capital Expenditures
 Outlays for plant assets,  Betterments, which
are improvements to a
natural resources, and
plant asset but that do
intangible assets
not add to the plant’s
 Additions, which are
physical layout
enlargements to the
 Extraordinary
physical layout of a
repairs, which are
plant asset
repairs that
significantly enhance a
plant asset’s estimated
useful life or residual
value
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9–13
Acquisition Costs
Includes all expenditures reasonable and necessary to
get an asset in place and ready for use
Installation costs
Freight
Insurance while in transit
Testing and setup
Are these items considered
acquisition costs?
Repair costs No
Interest charges on purchase No
© Royalty Free/ Corbis
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9–14
Acquiring Land
Costs that should be debited to
the Land account include:
Sample
Acquisition of Land
Purchase price
Agent commissions
Legal fees
Accrued taxes paid by
purchaser
Grading
Land preparation fees
Assessments for local
improvements
Landscaping
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Net purchase price
Brokerage fees
Legal fees
Tearing down old building
Less salvage
Grading
Total cost
$340,000
12,000
4,000
$10,000
8,000
12,000
2,000
$370,000
Improvements to real estate like fences,
driveways, or parking lots have a limited
life. They should be recorded in an account
called Land Improvements, not the Land
account.
9–15
Acquiring Buildings
Acquisition costs include:
Purchase price
Repairs and other
expenditures required
to put it in usable
condition
Buildings are subject to
depreciation because they
have a limited useful life
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© Royalty Free/ Corbis
9–16
Building Construction Costs
© Royalty Free/ Corbis
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 Materials and labor
 Overhead and other
indirect costs
 Architects’ fees
 Insurance during
construction
 Interest on construction
loans
 Lawyers’ fees
 Building permits
 Outside contractors
9–17
Leasehold Improvements
Improvements to leased property that become the property
of the lessor at the end of the lease
 Classified as tangible assets
in the property, plant, and
equipment section of the
balance sheet
 Costs of leasehold
improvements are
depreciated or amortized
over the remaining term of
the lease or the useful life of
the improvement, whichever
is shorter.
© Royalty Free/ Getty Images
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9–18
Acquiring Equipment
• Acquisition costs include:
Purchase price (less cash discounts)
All expenditures connected with purchasing the
equipment and preparing it for use
•
•
•
•
•
•
Freight
Insurance in transit
Excise taxes and tariffs
Buying expenses
Installation costs
Cost of test runs
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Equipment is subject
to depreciation
because it has a
limited useful life
9–19
Group Purchases
(example SE 4 hwk E 8)
Land and other assets may sometimes be purchased
for a lump sum
Because buildings are
depreciable and land is not,
the purchase price must be
allocated to each asset
Land
Building
Totals
Appraisal
$ 20,000
180,000
$200,000
10 %
90
100 %
ABC Co. buys a building and
the land on which it is situated
for a lump sum of $170,000.
Assume that appraisals yield
estimates of $20,000 for the
land and $180,000 for the
building if purchased separately.
Allocate as follows:
Percentage
($20,000 ÷ $200,000)
($180,000 ÷ $200,000)
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Apportionment
$ 17,000 ($170,000 x 10%)
153,000 ($170,000 x 90%)
$170,000
9–20
What Is Depreciation?
The periodic allocation of the cost of a tangible
asset (other than land and natural resources)
over the asset’s estimated useful life
 All tangible assets except land have a limited
useful life (physical deterioration and
obsolescence limit useful life)
 Depreciation refers to the allocation of the cost
of a plant asset to the periods that benefit from
the asset, not to the asset’s physical deterioration
or decrease in market value
 Depreciation is not a process of valuation; it is a
process of allocation
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9–21
Four Factors That Affect the
Computation of Depreciation
1. Cost
Net purchase price of an asset plus all
reasonable and necessary expenditures
to get it in place and ready for use
2. Residual
value
The portion of an asset’s acquisition
cost that a company expects to recover
when it disposes of the asset
3. Depreciable
cost
4. Estimated
useful life
Cost less residual value
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Total number of service units expected
from a long-term asset
9–22
Accounting for Depreciation
Depreciation is recorded at the end of the
accounting period by an adjusting entry
Depreciation Expense, Asset Name
Accumulated Depreciation, Asset Name
To record depreciation for the period
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xxx
xxx
9–23
Methods of Accounting for
Depreciation
Straight-line
method
Spreads the depreciable cost evenly
over the estimated useful life of the
asset
Production method
Based on the assumption that
depreciation is solely the result of use
and that passage of time plays no role
in the depreciation process
Accelerated method of depreciation
that results in larger amounts of
depreciation in earlier years of the
asset’s life and smaller amounts in
later years
Declining-balance
method
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9–24
Straight-Line Method Illustrated
A delivery truck costs $20,000 and has an estimated
residual value of $2,000 at the end of its estimated
useful life of 5 years.
Yearly Depreciati on 
Cost – Residual Value
Estimated Useful Life
$20,000 – $2,000

 $3,600 per year
5 years
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9–25
Depreciation Schedule,
Straight-Line Method
Date of purchase
End of first year
End of second year
End of third year
End of fourth year
End of fifth year
The amount of
depreciation is the
same each year
Cost
$20,000
20,000
20,000
20,000
20,000
20,000
Yearly
Depreciation
—
$3,600
3,600
3,600
3,600
3,600
Accumulated
depreciation
increases uniformly
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Accumulated
Depreciation
—
$3,600
7,200
10,800
14,400
18,000
Carrying
Value
$20,000
16,400
12,800
9,200
5,600
2,000
The carrying value
decreases uniformly until
it reaches the estimated
residual value
9–26
Production Method
A delivery truck costs $20,000 and has an estimated residual value of
$2,000 at the end of its estimated useful life of 90,000 miles. Assume the
truck was driven 20,000 miles during year 1; 30,000 miles during year 2;
10,000 miles during year 3; 20,000 miles during year 4; and 10,000 miles
during year 5.
Depreciati on Cost 

Cost – Residual Value
Estimated Units of Useful Life
$20,000 – $2,000
 $0.20 per mile
90,000 miles
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The unit of output
or use should be
appropriate for
that asset
9–27
Depreciation Schedule,
Production Method
Date of purchase
End of first year
End of second year
End of third year
End of fourth year
End of fifth year
Cost
$20,000
20,000
20,000
20,000
20,000
20,000
There is a direct relation
between the amount of
depreciation each year
and the units of output
or use.
Miles
—
20,000
30,000
10,000
20,000
10,000
Yearly
Depreciation
—
$4,000
6,000
2,000
4,000
2,000
Accumulated
depreciation increases
each year in direct
relation to units of
output or use.
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Accumulated
Depreciation
—
$4,000
10,000
12,000
16,000
18,000
Carrying
Value
$20,000
16,000
10,000
8,000
4,000
2,000
The carrying value
decreases each year in
direct relation to units of
output or use until the
estimated residual value is
reached.
9–28
Declining-Balance Method
 Based on the passage of time
 Assumes that many kinds of
plant assets are most efficient
when new
 Is consistent with the
matching rule
 Any fixed rate can be used
 Most common rate is twice
the straight-line depreciation
percentage (called doubledeclining-balance method)
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9–29
Double-Declining-Balance
Method Illustrated
A delivery truck costs $20,000 and has an estimated residual
value of $2,000. Its estimated useful life is 5 years.
Under the straight-line method, the depreciation rate for each
year is 20 percent:
100 percent  5 years  20 percent
Under the double-declining-balance method, the depreciation
rate for each year is 40 percent:
2  20 percent  40 percent
This fixed rate is applied to the remaining carrying value
at the end of each year.
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9–30
Depreciation Schedule,
Double-Declining-Balance Method
Yearly Depreciation
Date of purchase
End of first year
End of second year
End of third year
End of fourth year
End of fifth year
Cost
$20,000
20,000
20,000
20,000
20,000
20,000
Note that the fixed
rate is always applied
to the carrying value
at the end of the
previous year.
(40% x $20,000)
(40% x $12,000)
(40% x $7,200)
(40% x $4,320)
Depreciation is
greatest in the first
year and declines
each year after that.
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$8,000
4,800
2,880
1,728
592
Accumulated
Depreciation
—
$8,000
12,800
15,680
17,408
18,000
Carrying
Value
$20,000
12,000
7,200
4,320
2,592
2,000
The depreciation in the last
year is limited to the amount
necessary to reduce the
carrying value to the residual
value.
($2,592 - $2,000 = $592
9–31
Graphic Comparison of Three Methods
of Determining Depreciation
(examples SE 5-7 hwk E10 P4)
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9–32
Group Depreciation
Companies often group
similar assets to
calculate depreciation
Group depreciation is
used in all fields of
industry and business
Average length of time
assets of the same type
are expected to last
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© Royalty Free C Squared Studios/ Getty Images
9–33
Methods of Disposal
When plant
assets are no
longer
useful…
 Discard
 Sell for cash
 Exchange for another asset
1. Record depreciation for the
partial year up to the date of
disposal
2. Remove the carrying value of
the asset
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9–34
Discarded Plant Assets
 Plant assets rarely last
as long as their
estimated lives
 Never depreciate past
point at which carrying
value equals residual
value
 Total accumulated
depreciation should
never exceed total
depreciable cost
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© Royalty Free/ Corbis
9–35
Disposal of a Depreciable Asset
KOT Company purchased a machine on January 2, 2009, for $13,000 and
planned to depreciate it on a straight-line basis over its estimated useful life
(8 years). Its residual value at the end of 8 years is estimated to be $600.
On December 31, 2015, the balances of the relevant accounts were:
Machinery
Accumulated Depreciation, Machinery
13,000
9,300
On January 2, 2015, management disposed of the asset.
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9–36
Disposal of a Plant Asset
Remove the carrying value of the asset
• Carrying value is computed by subtracting accumulated
depreciation from the acquisition cost of the asset
• If the asset is fully depreciated, the carrying value is zero
• If the asset is not fully depreciated, a loss is recorded
Jan. 2
Accumulated Depreciation, Machinery
Loss on Disposal of Machinery
Machinery
Discarded machine no longer
used in business
Machinery
13,000
Bal.
9,300
3,700
13,000
Accum. Depreciation, Machinery
13,000
-0-
9,300
9,300
Bal.
-0-
Gains and losses on disposal of plant assets
are classified as other revenues and expenses
on the income statement.
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9–37
Selling a Plant Asset for Cash
 In addition to removing the carrying value of the
asset, you will also record the cash received
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 If cash received =
carrying value, no gain
or loss is recorded
 If cash received <
carrying value, loss
is recorded
 If cash received >
carrying value, gain
is recorded
9–38
Selling an Asset for Cash
Cash Received = Carrying Value
Received $3,700 cash for sale of machinery.
Remove the carrying value of the asset and record receipt of cash:
Jan. 2
Cash
Accumulated Depreciation, Machinery
Machinery
Sale of machinery for carrying
value; no gain or loss
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3,700
9,700
13,00
9–39
Selling an Asset for Cash
Cash Received < Carrying Value
Received $2,000 cash for sale of machinery.
Remove the carrying value of the asset and record receipt of cash:
Jan. 2
Cash
2,000
Accumulated Depreciation, Machinery
9,300
Loss on Sale of Machinery
1,700
Machinery
Sale of machinery at less than carrying
value; loss of $1,700 recorded
($3,700 – $2,000)
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13,000
9–40
Selling an Asset for Cash
Cash Received > Carrying Value
(example SE 8 hwk E 13)
Received $4,000 cash for sale of machinery.
Remove the carrying value of the asset and record receipt of cash:
Jan. 2
Cash
4,000
Accumulated Depreciation, Machinery
9,300
Gain on Sale of Machinery
Machinery
Sale of machinery at more than carrying
value; gain of $300 recorded
($4,000 – $3,700)
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300
13,000
9–41
What Are Natural Resources?
Assets that are converted to inventory by
cutting, pumping, mining, or other extraction
methods
Timberlands
Oil and Gas Reserves
Mineral Deposits
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Record at acquisition
cost and show on the
balance sheet as
long-term assets
9–42
Depletion of Natural Resources
(1) The exhaustion of a natural resource and
(2) The proportional allocation of the cost of a
natural resource to the units extracted
Costs are allocated
much like the
production method
of depreciation
© Royalty-Free/Corbis
Cost of Natural Resource - Residual Value
Depletion Cost per Unit 
Estimated Number of Units Available
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9–43
Recording Depletion Expense
A mine that cost $3,600,000 has an estimated 3,000,000 tons of coal.
The estimated residual value of the mine is $600,000. During the first
year, 230,000 tons of coal are mined and sold.
Cost of Natural Resource - Residual Value
Depletion Cost per Unit 
Estimated Number of Units Available
$3,600,000 - $600,000

 $1 per ton
3,000,000 tons
Dec. 31
Depletion Expense, Coal Deposits
Accumulated Depletion, Coal Deposits
To record depletion of coal mine: $1
per ton, 230,000 tons mined and sold
230,000
230,000
Natural resources that have been extracted but not sold are considered inventory
and are not recorded as an expense until the year sold.
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9–44
Depreciation of Closely Related
Plant Assets
(example SE 9 hwk E 15)
Closely related long-term assets are those assets
necessary to extract the resource
(Conveyors, drilling, and pumping devices)
 If the life of the asset is
longer than the life of the
resource, depreciate on the
same basis as the depletion is
computed
 If the life of the asset is
shorter than the life of the
resource, depreciate over the
shorter life of the asset
© Royalty Free C Squared Studios/ Getty Images
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9–45
What Is an Intangible Asset?
Long-term, nonphysical
asset whose value comes
from the rights or
advantages afforded its
owner
Goodwill
Trademarks
Brand names
Copyrights
Patents
Leaseholds
Software
Customer lists
© Royalty Free C Squared Studios/ Getty Images
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9–46
Importance of Intangibles
For some companies, intangible assets make up a
substantial portion of total assets
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9–47
Accounting for Intangible Assets
Intangibles developed
by a firm for its own
benefit
Record as expense
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Intangibles acquired
from others
Record as asset; amortize
over the shorter of useful
life or legal life (not to
exceed 40 years)
9–48
Difficult Issues When
Accounting for Intangibles
How to account for the initial carrying value?
How to account for that amount under normal
business conditions (periodic write-off or
amortization)?
How to account for the amount if the value
declines substantially and permanently?
How to estimate an intangible asset’s value
and useful life?
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9–49
Intangible Assets Illustrated
Later Bottling Company purchases a patent on a unique bottle cap for
$36,000. The patent will last for 20 years, but the product using the cap
will be sold only for the next six years.
Record the purchase of the patent:
Patents
36,000
Cash
36,000
To record purchase of bottle cap
patent
Record the annual amortization expense:
Amortization Expense
Patents
To record amortization expense for
patent ($36,000 ÷ 6 years)
6,000
6,000
Notice that the Patents account is directly reduced by the amount of amortization
expense, whereas depreciation or depletion is accumulated in separate contra
accounts for other long-term assets.
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9–50
Intangible Assets Illustrated
(hwk E 17)
The patent becomes worthless after only 1 year. Record the write-off:
Loss on Patent
Patents
30,000
30,000
To record the write-off of a
worthless patent
($36,000 – $6,000)
If the patent becomes worthless
before it is fully amortized, the
remaining carrying value is
written off as a loss by
removing it from the Patents
account.
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9–51
Research and Development Costs
The FASB requires that all R&D costs be treated as
revenue expenditures and charged to expense in the
period in which they are incurred.
Why?
 Too difficult to trace specific costs to specific profitable
developments
 Costs of research and development are continuous and
necessary for the success of a business and so should be
treated as current expenses
 Studies show that 30 to 90 percent of all new product fail
and 75 percent of new-product expenses go to unsuccessful
products
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9–52
Computer Software Costs
Costs incurred in developing
computer software for sale or
lease or for a firm’s internal use
are research and development Once a working program is
costs until the product has
ready, all costs are recorded
proved technologically feasible as assets
Costs incurred before
technologically feasible
should be charged to expense
as incurred
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Amortize over the
estimated economic life
using the straight-line
method
9–53
Goodwill
A company’s good reputation
Customer satisfaction
Good management
Manufacturing efficiency
Good location
© Royalty Free/ Corbis
Goodwill exists when a purchaser pays more for a business
than the fair market value of the business’s net assets
 Goodwill should not be recorded unless it is paid for in connection with
the purchase of a whole business
 Goodwill = Purchase price – FMV of identifiable net assets
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9–54