Elson Corporation, a retail fuel oil distributor, has increased its annual sales

Question

Elson Corporation, a retail fuel oil distributor, has increased its annual sales volume to a level three times greater than the annual sales of a dealer it purchased in 2006 in order to begin operations.

The board of directors recently received an offer to negotiate the sale of Elson Corporation to a large competitor. As a result, the majority of the board wants to increase the stated value of goodwill on the balance sheet to reflect the larger sales volume developed through intensive promotion and the current market price of sales gallonage. A few of the board members, however, would prefer to eliminate goodwill altogether from the balance sheet in order to prevent “possible misinterpretations.” Goodwill was recorded properly in 2006.


Explain the meaning of the term goodwill.
Explain why the book and fair values of the goodwill of Elson Corporation are different.
Discuss the propriety of (a) increasing the stated value of goodwill prior to the negotiations and (b) eliminating goodwill completely from the balance sheet prior to negotiations.
Cite all references used.

Explanation / Answer

Goodwill: Goodwill is an intangible asset that is created from such favorable factors as location, product quality, reputation, and managerial skills. Book value: Book value is the cost of the asset minus accumulated depreciation. Fair value: The price that would be received for selling an asset or paying off a liability. As the book value of the corporation is somewhat higher than the fair value, there will be difference in the two values. (a) Effect of increasing the stated value of goodwill: The increase in the stated value of the goodwill result in high value of the business, ultimately it leads to the increase in the selling price of the business.
(b) Effect of eliminating the goodwill: The elemination of goodwill from the balance sheet leads to the decrease in the value of the business, ultimately leads to the decrease in the selling price of the business.

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