Question

Amie, Inc., has 100,000 shares of $2 par value stock outstanding. Prairie Corporation acquired 30,000 of Amie's shares on January 1, 2015, for $120,000 when Amie's net assets had a total fair value of $350,000. On July 1, 2018, Prairie bought an additional 60,000 shares of Amie from a single stockholder for $6 per share. Although Amie's shares were selling in the $5 range around July 1, 2018, Prairie forecasted that obtaining control of Amie would produce significant revenue synergies to justify the premium price paid. If Amie's identifiable net assets had a fair value of $500,000 at July 1, 2018, how much goodwill should Prairie report in its postcombination consolidated balance sheet?

a. $60,000
b. $90,000
c. $100,000
d. $-0-

Answer 1

The goodwill Prairie Corporation should report is $0 since the total investment in Amie, Inc. of $480,000 is less than the fair value of the net assets of $500,000, and negative goodwill is not recognized in accounting.

Step-by-step explanation:

When Prairie Corporation acquires shares in Amie, Inc., and the identifiable net assets have a fair value that is less than the price paid, the difference is reported as goodwill on Prairie's consolidated balance sheet. To calculate goodwill, Prairie must first determine the total cost of their investment in Amie and then subtract Amie's fair value of net assets at the date of each transaction.

Initially, Prairie acquired 30,000 shares for $120,000. The second purchase was for 60,000 shares at $6 per share, amounting to $360,000. Combining both transactions, Prairie's total investment is $120,000 + $360,000 = $480,000. As of July 1, 2018, the fair value of Amie's net assets was $500,000. Therefore, the reported goodwill will be Prairie's total investment of $480,000 minus the $500,000 fair value of the net assets, which equals a goodwill of negative $20,000. However, in accounting, negative goodwill is not recognized. Instead, Prairie would adjust the acquisition price or the fair values of the assets and liabilities to ensure that goodwill is not negative. Therefore, the correct amount of goodwill to report would be $0.