Question

Prolean Corporation acquired Setlan Company for 6,000,000. Setlan's book value was 2,000,000 at the date of acquisition. The 6,000,000 purchase price includes accounting and legal fees of 200,000. The book values of Setlan's assets and liabilities equaled their fair values, except for Inventory (overvalued by 15,000) and Land (undervalued by 80,000). What is the goodwill reported for this acquisition?

Answer 1

Goodwill is calculated as the purchase price minus the acquisition-related costs and adjusted book value of the acquired company. After adjusting the book value of Setlan and subtracting accounting and legal fees, the reported goodwill for Prolean Corporation's acquisition of Setlan is $3,735,000.

Step-by-step explanation:

To calculate the goodwill in Prolean Corporation's acquisition of Setlan Company, we need to adjust the book value for any differences between the book values and fair values of the acquired assets and liabilities. The adjustments are as follows: Inventory is overvalued by $15,000, so we subtract this amount, and Land is undervalued by $80,000, so we add this amount. After these adjustments, the new book value of Setlan will be:

$2,000,000 - $15,000 (Inventory adjustment) + $80,000 (Land adjustment) = $2,065,000.

The value of goodwill can then be calculated by taking the purchase price, subtracting any acquisition-related costs, and then subtracting the adjusted book value of the company:

$6,000,000 (Purchase price) - $200,000 (Accounting and legal fees) - $2,065,000 (Adjusted book value) = $3,735,000.

Therefore, the goodwill reported for this acquisition would be $3,735,000.