An acquirer made the following entry to report an acquisition:
$$\begin{array} { | l | l | r | r | }
\hline \text { Tangible assets } & & 4,000 & \
\hline \text { Customer lists } & & 600 & \
\hline \text { Goodwill } & & 1,000 & \
\hline & \text { Liabilities } & & 2,000 \
\hline & \text { Cash } & & 3,600 \
\hline
\end{array}$$ Six months after the acquisition, the customer lists are determined to be worthless. How is this information reported if (1) the new information relates to the value of the customer lists as of the date of acquisition, and (2) the new information relates to changes in value since acquisition?

Question

An acquirer made the following entry to report an acquisition:
$$\begin{array} { | l | l | r | r | } 
\hline \text { Tangible assets } & & 4,000 & \
\hline \text { Customer lists } & & 600 & \
\hline \text { Goodwill } & & 1,000 & \
\hline & \text { Liabilities } & & 2,000 \
\hline & \text { Cash } & & 3,600 \
\hline
\end{array}$$ Six months after the acquisition, the customer lists are determined to be worthless. How is this information reported if (1) the new information relates to the value of the customer lists as of the date of acquisition, and (2) the new information relates to changes in value since acquisition?

Quizplus · Accepted Answer

If the new information indicates that the customer lists were worthless as of the acquisition date, the initial valuation was incorrect. This error would be corrected by increasing goodwill by $600 to offset the overvaluation of the customer lists, as goodwill is a plug figure that captures the excess purchase price over the fair value of net identifiable assets. If the information pertains to a decrease in value after the acquisition, it would be recognized as a loss in the income statement, reflecting the impairment of the asset post-acquisition.

An Acquirer Made the Following Entry to Report an Acquisition