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 of goodwill will be reported in consolidated financial statements presented immediately following the combination if Zenith paid $550,000 for the acquisition?
A) $0
B) $50,000
C) $150,000
D) $40,000

Answer 1

To determine the bank's net worth, a T-account balance sheet is set up with assets including reserves, bonds, and loans totaling $620, and liabilities of deposits at $400. The net worth is the difference between assets and liabilities, which is $220 in this case.

Step-by-step explanation:

To calculate the bank's net worth, we need to set up a T-account balance sheet showing the bank's assets and liabilities. The assets include reserves of $50 and government bonds worth $70, along with loans made at $500, which in total equal $620. The bank's liabilities are the deposits totaling $400.

The net worth, also known as shareholders' equity, is found by subtracting the total liabilities from the total assets. Hence, the calculation would be: $620 (assets) - $400 (liabilities) = $220 (net worth).

It is important to note that in real-world banking, the bank must also maintain a minimum level of reserves as mandated by regulatory requirements. However, this exercise is simplified and does not take regulatory requirements into account.