Question

South Company acquires North Corporation for 20 million. The book value of North Corporation's net assets is15 million, while the fair value of the net assets is 18 million. The fair value of the liabilities assumed is2 million. Goodwill associated with the acquisition is:

1) $5 million
2) $2 million
3) $3 million
4) $0
5) $4 million

Answer 1

Goodwill is calculated as the excess of the purchase price over the fair value of the net assets. In this scenario, the goodwill associated with the acquisition of North Corporation by South Company is $4 million.

Step-by-step explanation:

The calculation of goodwill in a business acquisition involves determining the excess of the purchase price over the fair value of the net identifiable assets acquired. To calculate goodwill, you subtract the fair value of the net assets (assets minus liabilities) from the purchase price of the acquired company. In this case:

• Purchase price of North Corporation: $20 million
• Fair value of net assets (assets - liabilities): $18 million - $2 million = $16 million
• Goodwill = Purchase price - Fair value of net assets = $20 million - $16 million = $4 million

Therefore, the goodwill associated with the acquisition is $4 million.