Question

Bend Company's December 31, 2017 balance sheet reports assets of $13,210,000 and liabilities of $4,275,000. The book values of Bend's assets approximate their fair values, except for land, which has a fair value $600,000 greater than its book value. On December 31, 2017, Blue Corporation paid $11,775,000 to acquire Bend. What amount of goodwill should Blue record as a result of this purchase?

A.$2,240,000
B. $2,840,000
C. $1,640,000
D. $0

Answer 1

Blue Corporation should record goodwill of $2,240,000 from the acquisition of Bend Company, calculated as the difference between the purchase price and the net asset value of Bend, taking into account the adjustment for the fair value of land.

Step-by-step explanation:

To calculate the amount of goodwill Blue Corporation should record from the acquisition of Bend Company, we need to follow these steps:

• Determine the fair value of Bend Company's assets, including any adjustments for assets such as land.
• Subtract the amount of Bend's liabilities from their fair value of assets to find the net asset value.
• Subtract the net asset value from the purchase price paid by Blue Corporation.

Firstly, we adjust the book value of Bend's assets to include the additional $600,000 in land fair value: Adjusted assets = $13,210,000 + $600,000 = $13,810,000

Now, we calculate the net asset value by subtracting the liabilities:

Net asset value = Adjusted assets - Liabilities = $13,810,000 - $4,275,000 = $9,535,000

Finally, the goodwill amount is the excess paid over the net asset value:

Goodwill = Purchase price - Net asset value = $11,775,000 - $9,535,000 = $2,240,000

Therefore, the correct answer is A. $2,240,000.