Question

TMC​, ​Inc., dominates the​ snack-food industry with its Salty Chip brand. Assume that TMC purchased Red River Chips Company for $ 5.2 million cash. The market value of Red River Chips​' assets is $ 7 ​million, and Red River Chips has liabilities with a market value of $ 6.2 million.

a. Compute the cost of the goodwill purchased by TMC.
b. Explain how TMC will account for goodwill in future years?

Answer 1

a. $4.4 million

Step-by-step explanation:

a. For computing the cost of the goodwill, first we have to calculate the fair value of the net asset which is shown below:

The fair value of net asset = The market value of Red River Chips​' assets - the market value of liabilities

= $7 million - $6.2 million

= $0.8 million

And, the purchase value of Red River Chips for cash is $5.2 million

So, the goodwill would be

= $5.2 million - $0.8 million

= $4.4 million

b. Goodwill is an intangible asset that is recorded in the asset side of the balance sheet. It is used for impairment tests annually. Since the fair value is less than the carrying value so the journal entry would be

Loss on impairment A/c Dr XXXXX

To Goodwill A/c XXXXX

(Being loss on impairment is recorded)