Question

Company A acquired all the outstanding common stock of Company B for $46,000,000 in cash. The book values and fair values of Company B assets and liabilities were as follows:

Book Value Fair Value
Current assets $ 17,000,000 $ 20,000,000
Property, plant, and equipment 31,600,000 37,600,000
Other assets 5,400,000 6,400,000
Current liabilities 9,800,000 9,800,000
Long-term liabilities 17,200,000 16,200,000

Required:
Calculate the amount paid for goodwill.

Answer 1

$8,000,000

Step-by-step explanation:

The computation of amount paid for goodwill is shown below:-

Net fair value of assets acquired = (Fair Value of current assets + Fair value of Property, plant, and equipment + Fair value of other assets) - (Fair value of Current liabilities + Fair value of Long-term liabilities)

= ($20,000,000 + $37,600,000 + $6,400,000) - ($9,800,000 + $16,200,000)

= $64,000,000 - $26,000,000

= $38,000,000

Amount paid for goodwill = Outstanding common stock - Net fair value of assets acquired

= $46,000,000 - $38,000,000

= $8,000,000

So, for computing the amount paid for goodwill we simply applied the above formula.