Question

Juliana Corporation purchased all of the outstanding stock of Caldwell Inc., paying $4,500,000 cash. Juliana assumed all of the liabilities of Caldwell. Book values and fair values of acquired assets and liabilities were:

Book Value Fair Value
Current assets (net) $230,000 $540,000
Property, plant, & equip. (net) 1,650,000 2,080,000
Liabilities 490,000 660,000
Juliana would record goodwill of:


$ 2,540,000.
$ 3,120,000.
$ 170,000.
$ 7,800,000.

Answer 1

The answer is $2,540,000

Step-by-step explanation:

Using Fair Value(FV) method :

Fair Value of Total Assets = FV of Property, Plant & Equipment + FV of Current Assets.

FV of Total Assets = $2,080,000+$540,000 = $2,620,000

FV of Liability (As given) = $660,000

FV of Net Assets = FV of Total Assets -FV of liabilities

= $2,620,000-$660,000= $1,960,000

Goodwill = Consideration paid- FV of Net Assets of the acquired company.

= $4,500,000-$1,960,000

= $2,540,000.

Goodwill represents the extra amount paid on the acquired company in excess of its net assets. This could be because the acquired has a stronger brand, better customer base or any other values that the acquirer considered as valuable for their business.