Question

In 2015, First Company purchased Second Company for $16,000,000 cash. At the time of purchase, Second Company has assets with a fair value of $18,500,000 and liabilities with a fair value of $11,000,000. Calculate the amount paid for goodwill:

Option 1: $10,500,000
Option 2: $8,500,000
Option 3: $3,500,000
Option 4: $0

Answer 1

The amount of goodwill paid in the purchase of Second Company by First Company is $8,500,000, which is calculated by subtracting the net assets ($7,500,000) from the purchase price ($16,000,000).

Step-by-step explanation:

If First Company purchased Second Company for $16,000,000 cash, and at the time of purchase, Second Company had assets with a fair value of $18,500,000 and liabilities with a fair value of $11,000,000, we calculate goodwill by subtracting the value of net assets (assets minus liabilities) from the purchase price. The net assets here are $18,500,000 (assets) - $11,000,000 (liabilities) = $7,500,000. Therefore, the goodwill is $16,000,000 (purchase price) - $7,500,000 (net assets) = $8,500,000. The correct option for the amount paid for goodwill is Option 2: $8,500,000.