Question

On December 31, 20X8, Peak Corporation acquired 80 percent of Summit Company's common stock for $160,000. At that date, the fair value of the noncontrolling interest was $40,000. Of the $75,000 differential, $10,000 related to the increased value of Summit's inventory, $20,000 related to the increased value of its land, and $25,000 related to the increased value of its equipment that had a remaining life of 10 years from the date of combination. Summit sold all inventory it held at the end of 20X8 during 20X9. The land to which the differential related was also sold during 20X9 for a large gain. At the date of combination, Summit reported retained earnings of $75,000 and common stock outstanding of $50,000. In 20X9, Summit reported net income of $60,000, but paid no dividends. Peak accounts for its investment in Summit using the equity method.

Based on the preceding information, the amount of goodwill reported in the consolidated financial statements prepared immediately after the combination is:
A) $0
B) $32,500
C) $26,000
D) $20,000

Answer 1

The amount of goodwill reported in the consolidated financial statements is $0.

Step-by-step explanation:

Goodwill is the amount paid by a company to acquire another company above the fair value of its net assets. In this case, Peak Corporation acquired 80% of Summit Company's common stock for $160,000, while the fair value of the noncontrolling interest was $40,000. The differential of $75,000 is allocated to various assets, including inventory, land, and equipment. None of the differential is allocated to goodwill, so the amount of goodwill reported in the consolidated financial statements is $0.