Question

Pilgrim Corporation acquires all of the stock of Sonic Company for $5,000,000 in cash. Sonic's net assets had a book value of $3,000,000 at the date of acquisition. The book values of Sonic's assets and liabilities approximate fair values, except that Sonic reports inventories at $900,000 more than fair value and plant assets at $2,000,000 more than fair value. In addition, Sonic has unrecorded identifiable intangible assets with an estimated fair value of $5,000,000, appropriately capitalized according to GAAP. When recording its investment in Sonic, Pilgrim reports:________.

A. $0. No gain or goodwill resulting from the acquisition
B.$100,000 Gain resulting from the acquisition
C. $1,000,000 Goodwill resulting from the acquisition
D. $3,900,000 Gain resulting from the acquisition
E. $3,900,000 Goodwill resulting from the acquisition

Answer 1

Answer: $100,000

Step-by-step explanation:

Firstly, we determine the fair value of net asset which will be:

= $3,000,000 - $900,000 - $200,000

= $100,000

The gain that will be gotten from the acquisition and reported by Pilgrim when recording its investment will be:

= Fair value of net asset + Intangible assets unrecorded - Cash paid

= $100,000 + $5,000,000 - $5,000,000

= $100,000