Question

James Company acquires Smith Corporation for $10 million. The book value of Smith Corporation's net assets is $7 million, while the fair value of the net assets is $9 million. What is the goodwill associated with the acquisition?

1) 0
2) $3 million
3) $1 million

Answer 1

The goodwill associated with James Company's acquisition of Smith Corporation is $1 million, calculated as the difference between the acquisition price ($10 million) and the fair value of the net assets ($9 million).

Step-by-step explanation:

The goodwill associated with the acquisition of Smith Corporation by James Company is the excess of the purchase price over the fair value of the net assets acquired. To calculate goodwill, we compare the purchase price of $10 million to the fair value of net assets, which is $9 million. Goodwill is determined by subtracting the fair value of net assets from the purchase price:

Purchase Price ($10 million) - Fair Value of Net Assets ($9 million) = Goodwill ($1 million)

Therefore, the goodwill associated with the acquisition is $1 million.