Recording Goodwill on the books

Have you ever seen “Goodwill” as an asset category on a set of financial statements? Do you wonder how the dollar amount was arrived at? Did you know that the only way Goodwill can be entered on the balance sheet is through a purchase?

For a definition and general understanding of Goodwill, be sure to read my blog article titled, “Valuing Goodwill: Avoid buying a Pig-in-a-Poke”. Let’s assume you’ve done that and you now know that Goodwill is the difference between the value of a business enterprise as a whole and the sum of the current fair values of its identifiable tangible and intangible net assets.

Let’s also assume that you have just purchased a sole proprietorship small business for $150,000. You paid for it by making a down payment of $50,000 from personal funds and acquired a bank loan for the remaining $100,000. The purchase consists of $70,000 in Fixed Assets, and $80,000 in Goodwill. The journal entry would be:

Account Debit Credit

Fixed Assets $70,000

Goodwill $80,000

Notes Payable $100,000

Capital Contributions $ 50,000

You know you can depreciate the Fixed Assets, but can you write off Goodwill? According to the Internal Revenue Service, under the MACRS system, Goodwill can be amortized over a fifteen year period.

If you bought the business on July 1, the first year’s amortization would be $2,666.67. Each full year would be $5,333.33. Simply divide $80,000 by 15 to get $5,333.33. Divide that amount by 2 to arrive at $2,666.67. Depending on what month of the year you purchased the business determines the amount amortization expense. The journal entry to record amortization for Goodwill would look like this:

Account Debit Credit

Amortization Expense $2,666.67

Accumulated Amortization $2,666.67

Pretty straightforward, wouldn’t you say?