Question

Plummet Corporation reported the book value of its net assets at $400,000 when Zenith Corporation acquired 100 percent ownership. The fair value of Plummet's net assets was determined to be $510,000 on that date.

Based on the preceding information, what amount will be recorded by Zenith as its investment in Plummet, if it paid $500,000 for the acquisition?
A) $610,000
B) $400,000
C) $500,000
D) $510,000

Answer 1

Zenith Corporation will record $90,000 of goodwill and $510,000 as its investment in Plummet.

Step-by-step explanation:

The fair value of Plummet's net assets is greater than its book value, indicating that there is goodwill associated with the acquisition. Goodwill is the excess of the purchase price over the fair value of net assets acquired. In this case, Zenith Corporation paid $500,000 for the acquisition, which is $90,000 more than the fair value of Plummet's net assets. Therefore, Zenith will record $90,000 of goodwill and $510,000 as its investment in Plummet, which is equal to the fair value of net assets.