James Company acquired a competitor company in January 2011. When James’s bookkeeper recorded the acquisition, he correctly recorded an amount for goodwill based on the expectation of the acquired company’s earning a rate of return on its assets that was in excess of the industry’s rate of return. In early 2013, the chief financial officer (CFO) of the James Company asked the company’s bookkeeper to increase the amount recognized as goodwill as the result of increased James Company earnings.
After reading the scenario, how would you define e term goodwill to a layperson and explain the bookkeeper’s treatment under current generally accepted accounting principles (GAAP) for goodwill that is acquired through an external transaction.
Do you think that the CFO’s request to increase the recorded amount of goodwill is appropriate? Explain the reasoning for your position.