Echo Corp., a retail propane gas distributor, has increased its annual sales volume to a level that is three times greater than the annual sales of a dealer that it purchased in 2019 in order to begin operations. Echo’s board of directors recently received an offer to negotiate the sale of the company to a large competitor. As a result, the majority of the board members want to increase the stated value of goodwill on the balance sheet to reflect the larger sales volume that it developed through intensive promotion and the product’s current market price. A few of the board members, however, would prefer to eliminate goodwill from the balance sheet altogether in order to prevent possible misinterpretations. Goodwill was recorded properly at the start of fiscal 2019.

Instructions

a. Discuss the meaning of the term “goodwill.”

b. Why are the book and fair values of Echo Corp.’s goodwill different?

c. Discuss the appropriateness of each of the following:

1. Increasing the stated value of goodwill prior to the negotiations

2. Eliminating goodwill completely from the balance sheet