Question

Vasquez Manufacturing Company decided to expand further by purchasing Wasserman Company. The balance sheet of Wasserman Company as of December 31, 2015 was as follows:

Wasserman Company
Balance Sheet
December 31, 2015
Assets Liabilities and Equities
Cash $210,000 Accounts payable $375,000
Receivables 550,000 Common stock
800,000
Inventory 275,000 Retained earnings 885,000
Plant assets (net) 1,025,000
Total assets $2,060,000 Total liabilities and equities
$2,060,000
An appraisal, agreed to by the parties, indicated that the fair value of the inventory was $370,000 and that the fair value of the plant assets was $1,325,000. The fair value of the receivables is equal to the amount reported on the balance sheet. The agreed purchase price was $2,275,000, and this amount was paid in cash to the previous owners of Wasserman Company.
Determine the amount of goodwill (if any) implied in the purchase price of $2,275,000.
Goodwill $_____

Answer 1

Goodwill is the excess of the purchase price over the fair market value of a company's net assets. In this case, the adjusted total assets of Wasserman Company after appraisal are $2,455,000, and the purchase price is $2,275,000. Since the purchase price is less than the fair market value of the net assets, there is no goodwill implied; rather, the company was purchased at a discount.

Step-by-step explanation:

To determine the amount of goodwill in the purchase price of Wasserman Company by Vasquez Manufacturing Company, we first need to adjust the balance sheet values to their fair market values. The appraisal confirmed that the fair value of Wasserman Company's inventory and plant assets is higher than the book values reported on the balance sheet.

The current book values and fair values are as follows:

Inventory: Book Value = $275,000; Fair Value = $370,000

Plant Assets: Book Value = $1,025,000; Fair Value = $1,325,000

The total adjustment in fair value over book value is:

($370,000 - $275,000) + ($1,325,000 - $1,025,000) = $95,000 + $300,000 = $395,000

We add this to the original total assets value to get the adjusted total assets value:

$2,060,000 + $395,000 = $2,455,000

The purchase price paid was $2,275,000. To find the goodwill, we subtract the adjusted total assets from the purchase price:

$2,275,000 - $2,455,000 = -$180,000

Since goodwill cannot be a negative value, it means there is no goodwill implied in the purchase price. Instead, Vasquez Manufacturing Company bought Wasserman Company for less than the fair market value of the net assets.