Elson Corporation, a retail fuel oil distributor, has increased its annual sales volume to a level three times greater than the annual sales of a dealer it purchased in 2003 in order to begin operations. The board of directors recently received an offer to negotiate the sale of Elson Corporation to a large competitor. As a result, the majority of the board wants to increase the stated value of goodwill on the balance sheet to reflect the larger sales volume developed through intensive promotion and the current market price of sales gallonage. A few of the board members, however, would prefer to eliminate goodwill altogether from the balance sheet in order to prevent ?opossible misinterpretations.?? Goodwill was recorded properly in 2003.
1. Explain the meaning of the term goodwill.
2. Explain why the book and fair values of the goodwill of Elson Corporation are different.
3. Discuss the propriety of
(a) Increasing the stated value of goodwill prior to the negotiations and
(b) Eliminating goodwill completely from the balance sheet prior to negotiations.