Question

A and B Companies have been operating separately for five years. Each company has a minimal amount of liabilities and a simple capital structure consisting solely of voting common stock. In exchange for 40 percent of its voting stock, A Company acquires 80 percent of the common stock of B Company. This is a "tax-free" stock-for-stock exchange for tax purposes. B Company’s identifiable assets have a total net fair market value of $800,000 and a total net book value of $580,000. The fair market value of the A stock used in the exchange is $700,000, and the fair value of the noncontrolling interest is $175,000. The goodwill reported following the acquisition would be

a. Zero
b. $60,000
c. $75,000
d. $295,000

Answer 1

c. $75,000

Step-by-step explanation:

According to IFRS 3, "Business Combinations":

Goodwill=(C + NCI + FV) − NA

where:

C=Consideration transferred

NCI=Amount of non-controlling interest

FV=Fair value of previous equity interests

NA=Net identifiable assets

In the case of A and B Companies:

Goodwill = (C + NCI + FV) − NA

Goodwill = (700,000 + 175,000) – 800,000

Goodwill = 75,000