Question

Mercury Corporation acquired 100 percent of the stock of Jupiter Company when the book value of Jupiter's net assets was $250,000. The fair value of Jupiter's net assets was $280,000 on the acquisition date.

Based on the preceding information, what amount of goodwill will be reported in consolidated financial statements presented immediately following the combination if Mercury paid $295,000 for the acquisition?
A) $0
B) $5,000
C) $15,000
D) $45,000

Answer 1

Mercury Corporation's acquisition of Jupiter Company will result in reporting $15,000 of goodwill on the consolidated financial statements since the purchase price of $295,000 exceeds the fair value of Jupiter's net assets by that amount. The correct option is C.

Step-by-step explanation:

The acquisition of Jupiter Company by Mercury Corporation involves calculating the amount of goodwill that will appear on the consolidated financial statements immediately following the business combination. Goodwill is recognized when the purchase price for an acquisition exceeds the fair value of the net identifiable assets acquired. To determine the amount of goodwill, we calculate the difference between the purchase price and the fair value of the net assets acquired.

The fair value of Jupiter's net assets is given as $280,000. Since Mercury paid $295,000 for the acquisition, which is higher than the fair value of Jupiter's net assets, goodwill is indeed present. The calculation for goodwill in this scenario is as follows:

Purchase Price - Fair Value of Net Assets = Goodwill
$295,000 - $280,000 = $15,000

Thus, the amount of goodwill to be reported in the consolidated financial statements immediately following the combination is $15,000, which corresponds to option C.