Question

A company acquires the assets and liabilities of another company. The fair value of the acquired company's identifiable net assets is 5,000,000. The acquisition transaction includes the following: A. 5,000,000 in cash paid to the former owners of the acquired company B. 150,000 new shares of stock with a market value of 45/share. C. Registration fees, paid in cash, were 1,000,000. D. 4,000,000 in cash paid to the underwriter for consulting services. E. Earnings contingency with an expected present value of 3,000,000 at the date of acquisition. What is the goodwill for this acquisition?

Answer 1

Goodwill in an acquisition is calculated by subtracting the fair value of the acquired company's net assets from the total purchase consideration. In this case, the total purchase consideration is $14,750,000 and the fair value of the net assets is $5,000,000, resulting in goodwill of $9,750,000.

Step-by-step explanation:

The determination of goodwill in an acquisition involves comparing the purchase consideration with the fair value of the acquired net assets. To calculate goodwill, you add up the total purchase consideration, which includes any cash paid, the value of shares issued, and any contingent consideration, and then subtract the fair value of the net identifiable assets.

• Cash paid to former owners: $5,000,000
• Value of new shares issued (150,000 shares at $45/share): $6,750,000
• Contingent earnings (expected present value): $3,000,000.
• Cash paid for registration fees and cash paid to underwriters are costs of issuing equity and are not included in the purchase consideration.

Total purchase consideration is $5,000,000 (cash) + $6,750,000 (shares) + $3,000,000 (contingency) = $14,750,000. Subtracting the fair value of the net assets ($5,000,000) from this amount, we get goodwill of $9,750,000.