Intangible Assets and Goodwill
As the owner of Café 95 decided to migrate to Europe, we will take over the café. Click here to view the Balance Sheet and Income Statement of Café 95.
We acquired the café by paying the owner $180,000.00. We valued $55,000 for their recipe to roast the coffee bean and make pastries, as well as their reputation in the area.
Café 95 will be completely merged into Organic Food Everyday. Thus, we need to combine Café 95’s Balance Sheet into Organic Food Everyday’s Balance Sheet.
| Balance Sheet | Organic Food Everyday | Café 95 | Adjustments | Merged | Explanation |
|---|---|---|---|---|---|
| Assets | |||||
| Total Current Assets | 121,266 | 80,000 | (180,000) | 21,266 | We must deduct 180,000 from Organic Food Everyone’s Balance Sheet because we paid the cash to the owner. |
| Total Long-Term Assets | 9,000 | 30,000 | – | 39,000 | |
| Total Assets | 130,266 | 110,000 | (180,000) | 60,266 | |
| Liabilities & Equity | |||||
| Total Current Liabilities | 15,500 | 10,000 | – | 25,500 | |
| Total Long-Term Liabilities | 45,000 | 0 | – | 45,000 | |
| Equity | 69,766 | 100,000 | (100,000) | 69,766 | Café 95 is merged into Organic Food Everyone, so its Balance ceased to exist. |
| Total Liabilities & Equity | 130,266 | 110,000 | (100,000) | 140,266 | |
| Is Balance Sheet balance? | 😁 | 😁 | (80,000.00) 😕 | Why does Total Liabilities & Equity not equal to Total Assets after merged? |
What should we do to make the merged Balance Sheet balance? It means we need to fix $80,000 gap.
First, allocate value of Intangible Assets to the Balance Sheet.
| Acquisition Cost | 180,000 | Explanation |
| Café 95 is merged into Organic Food Everyone, so its Balance ceased to exist. | (100,000) | |
| Intangible Assets – Their recipe and their reputation | (55,000) | We will add Intangible Assets to the merged Balance Sheet. |
| Total Allocation | 155,000 | |
| Balance Sheet is still imbalance 😕 | 25,000 | 80,000 – 55,000 = 25,000 |
Second, give a name to $25,000: Goodwill. 😆
| Acquisition Cost | 180,000 | Explanation |
| Café 95 is merged into Organic Food Everyone, so its Balance ceased to exist. | (100,000) | |
| Intangible Assets – Their recipe and their reputation | (55,000) | We will add Intangible Assets to the merged Balance Sheet. |
| Goodwill | (25,000) | Goodwill arises when one company buys another and pays more than the target company is worth. |
| Total Allocation | 180,000 | |
| Balance Sheet is balance! 🥳 | 0 | 80,000 – 55,000 – 25,000 = 0 |
Third, we add Intangible Assets and Goodwill to the merged Balance Sheet.
| Balance Sheet | Organic Food Everyday | Café 95 | Adjustments | Merged | Explanation |
|---|---|---|---|---|---|
| Assets | |||||
| Total Current Assets | 121,266 | 80,000 | (180,000) | 21,266 | We must deduct 180,000 from Organic Food Everyone’s Balance Sheet because we paid the cash to the owner. |
| Intangible Assets | 55,000 | 55,000 | Their recipe and their reputation | ||
| Goodwill | 25,000 | 25,000 | Goodwill arises when one company buys another and pays more than the target company is worth. | ||
| Total Long-Term Assets | 9,000 | 30,000 | – | 39,000 | |
| Total Assets | 130,266 | 110,000 | (180,000) | 140,266 | |
| Liabilities & Equity | |||||
| Total Current Liabilities | 15,500 | 10,000 | – | 25,500 | |
| Total Long-Term Liabilities | 45,000 | 0 | – | 45,000 | |
| Equity | 69,766 | 100,000 | (100,000) | 69,766 | Café 95 is merged into Organic Food Everyone, so its Balance ceased to exist. |
| Total Liabilities & Equity | 130,266 | 110,000 | (100,000) | 140,266 | |
| Is Balance Sheet balance? | 😁 | 😁 | 🥳 | Why does Total Liabilities & Equity not equal to Total Assets after merged? |
Want to challenge your understanding of Business Combinations and Investments? Here you are.
Impact of Intangible Assets and Goodwill to the Financial Statements in a Glance
