Question

Big Company acquired the following assets and liabilities of Little Company (fair values listed below) for $470,000 cash.

Inventory $ 70,000
Land 100,000
Blding & Equip 320,000
Current Liab 50,000

Assuming these items are all recorded at their acquisition date fair values, what additional item needs to be recorded and how will it be accounted for in the future?
A) $30,000 Goodwill, capitalized and tested for impairment
B) $30,000 Bargain purchase, recognized in current earnings
C) $30,000 Bargain purchase, capitalized and recognized over time
D) $30,000 Goodwill, capitalized and amortized over time

Answer 1

Big Company must record $30,000 as Goodwill, an intangible asset, after acquiring Little Company's assets and liabilities. Goodwill is not amortized but instead tested for impairment on an annual basis. Therefore, the correct answer is A) $30,000 Goodwill, capitalized and tested for impairment.

Step-by-step explanation:

The additional item that needs to be recorded in the acquisition of assets and liabilities by Big Company from Little Company for $470,000 is Goodwill. This item appears when the purchase price exceeds the fair value of the identifiable net assets acquired.

Here, the fair value of assets acquired equals $70,000 (Inventory) + $100,000 (Land) + $320,000 (Building & Equipment) = $490,000. The fair value of liabilities is $50,000.

Thus, the net assets' fair value is $490,000 - $50,000 = $440,000. Since Big Company paid $470,000, the Goodwill amount is $470,000 - $440,000 = $30,000.

Goodwill is not amortized but is tested for impairment annually. Goodwill is recognized as an intangible asset on the balance sheet and can only be impaired based on the results of an impairment test. If impaired, its carrying value is written down to the adjusted fair value.