Question

Charles Company acquired Jackson Company for $2,000,000 cash. At that time, the fair value of recorded assets and liabilities was $1,500,000 and $250,000, respectively. If Jackson meets specified sales targets, Charles is required to pay an additional $200,000 in cash per the acquisition agreement. Charles estimates the probability of this to be 50%. The direct costs related to the acquisition were $50,000. What was the amount of the goodwill related to the acquisition?​

Answer 1

$950,000

Step-by-step explanation:

Goodwill is defined as the excess of Purchase Price over the Net Assets taken over.

therefore

Goodwill = Purchase Price - Fair Value of Net Assets taken over

Note : Acquisition cost is an expense and not included in this calculation.

Since the probability is more likely than not (Probability > or = 50 %) , we include the $200,000 in the Purchase Price

thus,

Goodwill = $2,200,000 - ($1,500,000 - $250,000)

= $950,000