Give me a break (FSA synthesis) its, balance, economic, increase, correct

slackeranalyst

MKF Consolidated reports $500 million in goodwill on its balance sheet. The market consensus indicates that the value of MKF’s intangible assets is $300 million. How should an analyst adjust MKF’s balance sheet? Reduce goodwill and:
A) increase liabilities by $200 million.
B) equity by $500 million.
C) equity by $200 million.
Your answer: B was incorrect. The correct answer was C) equity by $200 million.
If goodwill has no economic value apart from the firm, it should be eliminated from the balance sheet. If the value of the intangibles can be reliably estimated they can be substituted for accounting goodwill.
Wouldn’t the $500 million of goodwill be above and beyond intangible assets. I mean that’s where the goodwill was originally derived from?

cross-ied

I completely missed the question. TheAliman’s original post already gave the answer to why it should’ve been reduced to 300M.
As per your question that GW is beyond the intangible assets, you should review the purchase method. Gw is derived from purchase price- fair value of NET assets, which means intangibles are part of the GW, not a separate entry.
Am i missing something??

amqata

The intangible assets were most likely created internally (as opposed to purchased on their own or as part of purchasing a subsidiary)
Goodwill is only created when a company is purchased for greater than the fair value of its net assets.
The intangible assets could have been created after the transaction where the goodwill was created in which case they wouldn’t be recognized on the BS (you don’t write down goodwill simply because you’ve created intangibles or increased shareholders equity after the transaction)
Or they were created in the parent company before the transaction where the goodwill was created and they aren’t recognized on the BS because the goodwill is attached to the subsidiary (not the parent)