Question

During the past two years, through extensive advertising and improved customer relations, Brick Corporation estimated that it had developed customer goodwill worth $500,000. For the current year, determine the amount of goodwill Brick Corporation may amortize.

1) $26,667
2) $100,000
3) $33,333
4) $16,667
5) None of these choices are correct.

Answer 1

Brick Corporation cannot amortize any amount of the internally generated goodwill of $500,000, as such goodwill is not recognized as an asset under GAAP and cannot be measured at cost.

Step-by-step explanation:

The amount of goodwill that Brick Corporation may amortize for the current year is none. Goodwill is recognized for accounting purposes when a business is purchased, and the amount of goodwill is the excess of the purchase price over the fair market value of the net assets. In the case presented, Brick Corporation has developed its own goodwill through advertising and improved customer relations, which is often referred to as internally generated goodwill. According to generally accepted accounting principles (GAAP), internally generated goodwill is not recognized as an asset because it is not an identifiable resource controlled by the company that can be measured reliably at cost. Therefore, internally generated goodwill cannot be amortized.

Goodwill is an intangible asset that represents the value of a company's reputation and customer relationships. It is often generated through advertising and improved customer relations, as in the case of Brick Corporation. However, goodwill is not amortized. Instead, it is subject to an annual impairment test to ensure it is still valued at its original amount. If there is a decrease in value, the company would recognize an impairment loss on its financial statements.