Question

TX, Inc., dominates the snack-food industry with its Salty Chip brand. Assume that TX purchased Valloy Chips Company for S6.0 million cash. The market value of Valley Chips' assets is $5 million, and Valley Chips has liabilities with a market value of $4.1 million. Read the requirements. Requirement 1. Compute the cost of the goodwill purchased by TX. (Enter amounts in millions to the nearest tenth of a million as provided in the problem statement, x× Requirements 1. Compute the cost of the goodwill purchased by TX. 2. Explain how TX will account for goodwill in future years.

Answer 1

The cost of goodwill purchased by TX is $5.1 million, which is determined by subtracting the fair value of Valley Chips' net assets from the purchase price. In future years, TX will test the goodwill for impairment annually, without amortization, and recognize any impairment losses as necessary.

Step-by-step explanation:

The cost of the goodwill purchased by TX can be calculated by subtracting the fair value of the net assets of Valley Chips from the purchase price paid by TX. The fair value of net assets is the market value of the assets minus the market value of the liabilities. The calculation is as follows:

Purchase Price (Cash Paid): $6.0 million
Market Value of Assets: $5.0 million
Market Value of Liabilities: $4.1 million
Fair Value of Net Assets: $5.0 million - $4.1 million = $0.9 million
Goodwill: $6.0 million - $0.9 million = $5.1 million

To answer the accounting for goodwill in future years, TX will need to evaluate the goodwill for impairment annually. Goodwill is not amortized but rather tested for impairment. If the carrying amount of the goodwill exceeds its fair value, an impairment loss should be recognized in the financial statements.