Question

If a company generates its own goodwill through advertising or training, how should these costs be treated?

a. Capitalize the costs and amortize them over the expected life of the goodwill.
b. Record as an extraordinary loss in the current year.
c. Expense the costs as incurred.
d. Capitalize the costs and test for impairment.

Answer 1

Costs associated with generating goodwill through advertising or training should be expensed as incurred, rather than capitalized.

Step-by-step explanation:

When a company generates its own goodwill through activities like advertising or training, the costs associated with these activities should be treated according to accounting standards. The appropriate treatment for these costs is to expense the costs as incurred.

This is because the internally generated goodwill is not recognized as an asset in accounting due to the difficulty in measuring its value reliably. Unlike purchased goodwill, which can be capitalized and tested for impairment, internally generated goodwill should not be capitalized.