Question

Blue Sky Company's 12/31/12 balance sheet reports assets of $7,500,000 and liabilities of $3,000,000. All of Blue Sky's assets' book values approximate their fair value, except for land, which has a fair value that is $450,000 greater than its book value. On 12/31/12, Horace Wimp Corporation paid $7,650,000 to acquire Blue Sky. What amount of goodwill should Horace Wimp record as a result of this purchase?

A) $ -0-
B) $150,000
C) $2,700,000
D) $3,150,000

Answer 1

The correct amount of goodwill that Horace Wimp should record as a result of the purchase is C) $2,700,000.

Step-by-step explanation:

Goodwill is calculated as the excess of the purchase price over the fair value of identifiable net assets acquired. In this case, Horace Wimp paid $7,650,000 to acquire Blue Sky. The identifiable net assets are the fair value of assets minus the fair value of liabilities. The fair value of Blue Sky's assets is $7,500,000, and since land has a fair value that is $450,000 greater than its book value, the fair value of land is $450,000. Therefore, the identifiable net assets are $7,500,000 - $450,000 = $7,050,000.

The excess of the purchase price over the identifiable net assets is the amount of goodwill. Thus,
`\( Goodwill = Purchase\ Price - Identifiable\ Net\ Assets \)`.

Substituting the values, Goodwill = $7,650,000 - $7,050,000 = $600,000. However, since land has a fair value greater than its book value, this amount needs to be adjusted. The excess fair value of land is $450,000, so the adjusted goodwill is $600,000 - $450,000 = $150,000.

Therefore, Horace Wimp should record $150,000 as the amount of goodwill resulting from the purchase of Blue Sky, making option C the correct answer.