CM2 reports goodwill on its balance sheet. Knepp and Lopez indicate that the goo
ID: 2751253 • Letter: C
Question
CM2 reports goodwill on its balance sheet. Knepp and Lopez indicate that the goodwill was from the acquisition of small “garage-type” software development companies purchased a few years ago. CM2 purchased the software companies so that it could incorporate their software into the CM2 product line as well as to gain the expertise of their employees. Conner and Martin argue that no amortization should be recorded for goodwill because they have heard there is no reliable way to establish a useful life for the goodwill. However, they also know that a number of lawsuits have been filed against companies that have accounted for intangible assets incorrectly. So they want to know if CM2 is doing the right accounting in regard to its goodwill. In addition, they have heard that company names often have “value” similar to a brand. They believe that the CM2 name is becoming well-known in the industry and believe that recognizing this brand name in the financial statements makes sense for a fair presentation. They believe that the name is worth at least $125,000. They wonder, though, what effect the recording of this intangible will have on net income. Instructions Write a memo to CM2 management about the proper treatment of goodwill and company names or brands. Remember to write for non-accountants, but include citations of the authoritative literature so they know that you know what you are talking about.
Explanation / Answer
CM2 reports goodwill on its balance sheet. Knepp and Lopez indicate that the goo