The statement of financial position of Delacosta Corporation as at December 31, 2017, is as follows — Note Goodwill amount 000 was recognized because company believed that
The statement of financial position of Delacosta Corporation as at December 31, 2017, is as follows:
Note 1: Goodwill in the amount of $70,000 was recognized because the company believed that the carrying amount of assets was not an accurate representation of the company’s fair value. The gain of $70,000 was credited to Retained Earnings.
Note 2: Buildings are stated at cost, except for one building that was recorded at its appraised value as management determined the building to be worth more than originally paid at acquisition. The excess of the appraisal value over cost was $570,000. Depreciation has been recorded based on cost.
Note 3: Investments—trading are fair value through net income investments and have a fair value of $75,000. Investments in shares (fair value through OCI) have a fair value of $200,000. Both investments are currently recorded at cost.
Note 4: Notes payable are long-term except for the current instalment due of $100,000.
Instructions
(a) Prepare a corrected classified statement of financial position in good form. The notes above are for information only. Assume that you have decided not to use the revaluation model for property, plant, and equipment.
(b) From the perspective of a user of Delacosta’s statement of financial position, discuss the importance of proper accounting for goodwill.
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SOLUTION
(a)
Delacosta Corporation
Statement of Financial Position
December 31, 2017
Assets
Current assets
Cash
$175,900
$175,900
FV- NI investments
75,000
75,000
Accounts receivable
170,000
170,000
Inventory
312,100
312,100
Total current assets
$733,000
$733,000
Long-term investments
FV- OCI investments
200,000
200,000
Assets allocated to trustee for expansion:
Cash
$120,000
$120,000
$120,000
Treasury notes, at fair value
138,000
138,000
138,000
258,000
258,000
Total long-term investments
458,000
458,000
Property, plant, and equipment
Land
950,000
950,000
Buildings
Buildings
$1,070,000a
$1,070,000a
$1,070,000a
Less accumulated depreciation—buildings
410,000
410,000
410,000
660,000
660,000
1,610,000
1,610,000
Total assets
$2,801,000
$2,801,000
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable
Accounts payable
Accounts payable
$420,000
$420,000
Income tax payable
Income tax payable
Income tax payable
75,000
75,000
Current portion of notes payable
Current portion of notes payable
Current portion of notes payable
100,000
100,000
Total current liabilities
$ 595,000
$ 595,000
Long-term liabilities
Notes payable
500,000 b
500,000 b
500,000 b
Total liabilities
1,095,000
1,095,000
Shareholders’ equity
Common shares Unlimited number of shares authorized, 500,000 shares issued
$730,000
Retained earnings
863,000 c
863,000 c
Accumulated other comprehensive income
113,000 d
113,000 d
Total shareholders’ equity
1,706,000
1,706,000
Total liabilities and shareholders’ equity
$2,801,000
$2,801,000
a$1,640,000 – $570,000 (to eliminate the excess of appraisal value over cost from the building account. Note that the appreciation capital account is also deleted.)
b$600,000 – $100,000 (to reclassify the currently maturing portion of the note payable as a current liability.)
c$958,000 – $70,000 – $25,000 (to remove the value of goodwill from retained earnings and to reflect the unrealized holding loss on fair value-net income investments of $25,000. Note that the goodwill account is also deleted.)
d$113,000 (to reflect the unrealized holding gain of $113,000 on Fair Value-OCI investments.)
(b) Goodwill that is internally generated is not capitalized in the accounts, because measuring the components of internally generated goodwill is simply too complex and subjective, and because no transaction has taken place with outside parties. Goodwill is an asset representing the future economic benefits arising from other assets in a business combination that are not individually identified and separately recognized. Proper accounting of goodwill is necessary to present a statement of financial position that is useful and faithfully representative, and does not overstate assets.