Question

Marino Company had the following balance sheet on January 1, 2019:

Marino Company
Balance Sheet
January 1, 2019
1 Cash $20,000.00 Accounts payable $30,000.00
2 Inventory 30,000.00 Notes payable 150,000.00
3 Property, plant, and equipment 200,000.00
4 Patent 20,000.00 Shareholders’ equity 90,000.00
5 $270,000.00 $270,000.00

On January 1, 2019, Paul Company purchased Marino by acquiring all its outstanding shares for $300,000 cash. On that date, the fair value of the inventory was $10,000, and the fair value of the equipment was $230,000. In addition, the fair value of a previously unrecorded customer list was $25,000. For all other amounts, the book value of January 1, 2019, equaled fair value.

Required:
Compute the goodwill associated with the purchase of Marino.

Answer 1

To compute the goodwill associated with the purchase of Marino, calculate the fair value of Marino's net assets on January 1, 2019. The fair value of Marino's inventory is $10,000, and the fair value of the equipment is $230,000. The goodwill is the difference between the purchase price and the fair value of net assets.

Step-by-step explanation:

To compute the goodwill associated with the purchase of Marino, we first need to calculate the fair value of Marino's net assets on January 1, 2019. The fair value of Marino's inventory is $10,000, and the fair value of the equipment is $230,000. Since the book value of all other amounts equals fair value, there is no adjustment needed for these items.

The fair value of Marino's net assets is calculated as follows:

1. 
   
2. Inventory fair value: $10,000
3. 
   
4. Equipment fair value: $230,000
5. 
   
6. Book value of other items (cash, accounts payable, notes payable, patent, shareholders' equity): $270,000
7. 
   

Therefore, the fair value of Marino's net assets is $10,000 + $230,000 + $270,000 = $510,000.

The goodwill associated with the purchase of Marino is then calculated as the difference between the purchase price and the fair value of Marino's net assets:

Goodwill = Purchase price - Fair value of net assets

Goodwill = $300,000 - $510,000 = -$210,000 (negative value since the fair value of net assets exceeds the purchase price)