GAAP treatment of goodwill?

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Multiple Choice

GAAP treatment of goodwill?

GAAP treats goodwill as an asset that is not amortized. After a business combination, the acquired assets and liabilities are recorded at fair value, and any excess paid over the net identifiable assets becomes goodwill. That goodwill is not written off through regular amortization; instead, it is tested regularly for impairment—at least annually and more often if there are indicators of impairment. If impairment is identified, the loss is charged to the income statement as a goodwill impairment, reducing goodwill on the balance sheet and lowering net income. Why this choice fits: it captures both the purchase accounting practice (assets and liabilities at fair value) and the ongoing treatment of goodwill (not amortized, but regularly evaluated for impairment). The other options imply amortization, one-time-only impairment, or immediate expensing of goodwill, which are not consistent with GAAP.

GAAP treats goodwill as an asset that is not amortized. After a business combination, the acquired assets and liabilities are recorded at fair value, and any excess paid over the net identifiable assets becomes goodwill. That goodwill is not written off through regular amortization; instead, it is tested regularly for impairment—at least annually and more often if there are indicators of impairment. If impairment is identified, the loss is charged to the income statement as a goodwill impairment, reducing goodwill on the balance sheet and lowering net income.

Why this choice fits: it captures both the purchase accounting practice (assets and liabilities at fair value) and the ongoing treatment of goodwill (not amortized, but regularly evaluated for impairment). The other options imply amortization, one-time-only impairment, or immediate expensing of goodwill, which are not consistent with GAAP.

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