Explain the concept of Herman son’s Un purchased Goodwill Method
Question
Explain the concept of Herman son’s Un purchased Goodwill Method
Solution
The Herman son's Unpurchased Goodwill Method is a concept used in accounting to calculate the value of a business's goodwill when it is not purchased by another entity. This method is based on the assumption that the business will continue to operate and generate profits in the future.
Here are the steps to explain the concept of Herman son's Unpurchased Goodwill Method:
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Determine the fair value of the business's net assets: Net assets include tangible assets such as property, plant, and equipment, as well as intangible assets like patents, trademarks, and copyrights. The fair value is the estimated market value of these assets.
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Calculate the total value of the business: This is done by adding the fair value of the net assets to the estimated value of the business's future earnings potential.
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Subtract the fair value of the net assets from the total value of the business: This will give you the value of the business's goodwill.
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Allocate the value of goodwill to the appropriate accounting periods: The value of goodwill is typically allocated over a specific period of time, such as the estimated useful life of the business or a predetermined number of years.
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Monitor and assess the value of goodwill: It is important to regularly review and reassess the value of goodwill to ensure it remains accurate and relevant. Changes in market conditions or the business's performance may require adjustments to the value of goodwill.
Overall, the Herman son's Unpurchased Goodwill Method provides a systematic approach to valuing and accounting for goodwill when it is not purchased by another entity. It helps businesses recognize and measure the value of intangible assets that contribute to their overall worth.
Similar Questions
A goodwill is created when . A. Purchase price exceeds the net identifiable assets. B. Acquirer’s P/E is lower than target’s. C. Acquirer’s pro forma EPS is lower. D. Purchase price exceeds PPE.
In which type of account does Goodwill effect
Example 1The following information is given as at 31 March 20X1P Ltd. S Ltd.Non-current Assets:PPE 2,000 500Investment in Subsidiary 1,000Net Current Assets 2,000 5005,000 1,000Issued Capital 500 1,000Reserves and Surplus 4,5005,000 1,000P Ltd. acquired 100% of shares of S Ltd. on 31 March 20X1 for` 1,000.Since P Ltd. has acquired S Ltd., we will have to determine goodwill / capitalreserve. Let us understand why goodwill / capital reserve arises in case ofconsolidation, and what would be the interpretation of the same.© The Institute of Chartered Accountants of IndiaADVANCED ACCOUNTING10.22In the given case, P Ltd. acquired all the shares of S Ltd. by paying` 1,000. Thispayment (i.e., purchase consideration) would be made by P Ltd. to theshareholder(s) of S Ltd. (hence the transfer of this amount would not appear in thebooks of S Ltd.).By paying` 1,000, P Ltd. has acquired ‘control’ over S Ltd. This acqu isition is quitedifferent from the concept of amalgamation done in accordance with AS 14, thoughthe concept of goodwill / capital reserve is similar. Under AS 14, the targetcompany would generally liquidate, and all assets and liabilities would betransferred from the Selling Company to the Purchasing Company. In case ofconsolidation, P Ltd. is acquiring ‘control’ i.e., by way of acquiring equity shares in SLtd.. Thus, S Ltd. continues to exist, and the assets and liabilities of S Ltd. are nottransferred to P Ltd., but instead continue to remain with S Ltd. only. However, sincein substance, acquisition has taken place (albeit through transfer of control), thepurchase consideration of` 1,000 will be compared with the net worth ofS Ltd., which is` 1,000. Since amount paid (i.e., purchase consideration) equals thenet worth, no goodwill / capital reserve is recognized. In case the amount paid (i.e.,purchase consideration) would be higher / lower than the net worth of S Ltd., suchdifference would be recognized in Goodwill / Capital Reserve respectively.
Goodwill is equal to the excess of the cost of an acquired company over the sum of the:Group of answer choicesmarket value of its net assetsmarket value of its assetsbook value of its assetsbook value of its net assets
GoodwillGroup of answer choicesis only recorded when generated internally.can be subdivided and sold in partscan only be identified with the business as a whole.can be defined as normal earnings less accumulated amortization.
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