Question

On January 3, 2011, Austin Corp. purchased 25% of the voting common stock of GainsvilleCo., paying $2,500,000. Austin decided to use the equity method to account for thisinvestment. At the time of the investment, Gainsville's total stockholders' equity was$8,000,000. Austin gathered the following information about Gainsville's assets andliabilities:

On January 3, 2011, Austin Corp. purchased 25% of

For all other assets and liabilities, book value and fair value were equal. Any excess of costover fair value was attributed to goodwill, which has not been impaired. For all other assets and liabilities, book value and fair value were equal. Any excess of costover fair value was attributed to goodwill, which has not been impaired.

What is the amount of goodwill associated with the investment?

Answer 1

Amount of goodwill associated with the investment is $500,000

Step-by-step explanation:

The first step is to calculate the total value of GainsvilleCo:

Total Value of GainsvilleCo = 2,500,000 / 25% = $10,000,000

Book value of GainsvilleCo's underlying assets = $8,000,000

Goodwill = 10,000,000 - 8,000,000 = 2,000,000

Austin Corp Investor share = 25% of 2,000,000 = $500,000