Question

Company A acquires subsidiary Company Z for $200,000. At the time of acquisition, Company Z had net assets with a carrying value of $150,000, which was also the same amount as the net assets fair value. How would the $50,000 excess be recorded on the consolidated balance sheet?

Answer 1

Increase assets with Goodwill of $50,000

Step-by-step explanation:

When a company acquires another company at a value higher than the fair value of the assets acquired, a goodwill will be recognized in the consolidated balance sheet.

The goodwill and the acquisition of the assets, as given in the question, will be recorded in the consolidated balance sheet as follows.

Asset side: addition to net assets, $150,000

Asset side: goodwill, $50,000

Asset side: reduction in cash for acquisition, $200,000

If the acquisition was done via the issuance of shares, the last entry will be replaced with

Equity side: increase in issued shares, $200,000.