Amount paid for acquiring goodwill is __________.a)Revenue expenditureb)Capital expenditurec)Deferred capital expenditure.d)Deferred revenue expenditureCorrect answer is option 'B'. Can you explain this answer?

Question

Answer

Therefore, CAPEX is both amortized and depreciated, depending on whether it is tangible or intangible. To quote, 'Expenses incurred to acquire intangible assets such as goodwill, patents, etc. are also capital expenditure.

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Prepaid expenses

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As goodwill is a fixed intangible asset and its benefit will last for more than  a year because it is the amount paid for the brand name of company.

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Amount paid for acquiring goodwill is considered as a:
- Capital expenditure: The amount paid for acquiring goodwill is considered as a capital expenditure. This is because goodwill is an intangible asset that enhances the reputation and value of a business over time. It is an investment made by the business to generate future benefits.
- Revenue expenditure: Revenue expenditure refers to the expenses incurred in the normal course of business operations to maintain and generate revenue. Acquiring goodwill does not fall under this category as it is a one-time investment made to enhance the long-term value of the business.
- Deferred capital expenditure: Deferred capital expenditure refers to the capital expenditure that is incurred but not immediately reflected in the financial statements. However, the amount paid for acquiring goodwill is usually recognized as an immediate capital expenditure and is not deferred.
- Deferred revenue expenditure: Deferred revenue expenditure refers to the revenue expenditure that is incurred but its benefits are expected to be received over multiple accounting periods. The amount paid for acquiring goodwill is not considered as a deferred revenue expenditure as it is a capital expenditure rather than a revenue expense.
Therefore, the correct answer is B: Capital expenditure.

Answer

B

Answer

Explanation:

In accounting, goodwill is an intangible asset that represents the excess amount paid for acquiring a business over its net tangible assets. It is the value of a company's brand name, reputation, customer base, and other intangible factors that contribute to its success.

The amount paid for acquiring goodwill is considered a capital expenditure. Here's why:

Capital Expenditure:
1. Long-term benefit: Goodwill is expected to provide long-term benefits to the company by enhancing its reputation and generating future economic benefits.
2. Enhancement of business: Acquiring goodwill helps enhance the business's performance and competitiveness in the market, leading to increased profitability.
3. Non-recurring: Goodwill is not a regular or recurring expense but an investment made by the company to strengthen its market position.
4. Added value: The amount paid for acquiring goodwill adds value to the company and its overall net worth.
5. Capitalization: Goodwill is recorded as an intangible asset on the balance sheet and is amortized over its useful life.

Revenue Expenditure:
1. Short-term benefit: Revenue expenditure refers to expenses incurred for day-to-day operations and maintenance of the business, providing short-term benefits.
2. Regular and recurring: Revenue expenditures are regular and recurring expenses necessary to keep the business running smoothly.
3. No addition to value: Revenue expenditures do not add value to the company but are necessary to maintain its current operations.

Deferred Capital Expenditure:
1. Timing of recognition: Deferred capital expenditure refers to capital expenditure that is recognized over multiple accounting periods rather than immediately.
2. Goodwill recognition: The amount paid for acquiring goodwill is recognized at the time of acquisition and not deferred over multiple periods.

Deferred Revenue Expenditure:
1. Timing of recognition: Deferred revenue expenditure refers to revenue expenditure that is recognized over multiple accounting periods rather than immediately.
2. Goodwill recognition: Goodwill is not a revenue expenditure as it is not incurred for day-to-day operations or maintenance but for acquiring intangible assets.

Therefore, the correct answer is option B) Capital expenditure as the amount paid for acquiring goodwill is a long-term investment that adds value to the company.

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