Problem: Gulwest Industries, a public company, used a contrived amount of goodwill to overstate assets and disguise
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In an agreement with a different public company (Big Industrial), Gulwest and Big created another company (BigShot Ammunition). Gulwest transferred all the Amron assets to BigShot in exchange for (1) common and preferred shares of Big, valued at $2 million, and (2) a note from BigShot in the amount of $3.4 million. Big Industrial thus acquired 100% of the shares of BigShot. Gulwest management reasoned that it had “given” Amron shares valued at $12.4 million to receive shares and notes valued at $5.4 million, so the difference must be goodwill. Thus, the Gulwest accounts carried amounts for Big Industrial shares ($2 million), BigShot note receivable ($3.4 million), and goodwill ($7 million). Audit trail: Gulwest directors included in the minutes an analysis of the sporting ammunition business’s lack of profitability. The minutes showed approval of a plan to dispose of the business, but they did not use the words “discontinue the business.” The minutes also showed approval of the creation of Amron, the deal with Big Industrial along with the formation of BigShot, and the acceptance of Big’s shares and Bigshot’s note in connection with the final exchange and merger.
Amount: As explained above, Gulwest avoided reporting a writeoff of $7 million by overstating the value of the assets given in exchange for the Big Industrial shares and the BigShot Ammunition note. Goodwill
Goodwill is an important concept and terminology in accounting which means good reputation. The word goodwill is used at various places in accounting but it is recognized only at the time of a business combination. There are generally two types of... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
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Related Book For
Auditing An International Approach
ISBN: 978-0071051415
6th edition
Authors: Wally J. Smieliauskas, Kathryn Bewley
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