Question: Table Corporation purchased Chairs Unlimited for 10 million The
Table Corporation purchased Chairs Unlimited for $10 million. The fair market value of Chairs’ net assets at the time was $8 million, so Table Corporation recorded $2 million of good will. Also included in the purchase was a patent valued at $1 million with an estimated remaining life of 1 0 years. To comply with GAAP, the goodwill was not amortized, but the patent was amortized over the remaining 10-year life. However, the Chairs Unlimited business was not as profitable as anticipated and as a result, the accountant for Table Corporation stated that the goodwill needed to be written off. Further, the accountant discovered that the remaining life of the patent was only 6 years and that it should be amortized over the remaining 6-year life rather than the 10-year life originally estimated. The CEO became concerned because these adjustments would cause net income to be extremely low for the year. As a result, he told the accountant to wait before writing off the goodwill because of the possibility that the purchase could be profitable in the future. Also, he argued, the life of the patent should be left alone because it was originally based upon what was thought to be a 10-year life. After much debate, the CEO then agreed with the accountant as long as the amount of goodwill was not completely written off in the current year. What ethical concerns are involved? Should the accountant change the amortizable life of an intangible asset? Should the accountant completely write off the goodwill account in the current year? Does the CEO’s concern for higher net income create any ethical problems when the accountant agrees to not completely write off the goodwill? Do you have any other thoughts?
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