Question

Huey Company acquires 100% of the stock of Solar Corporation on January 1, 2019, for $2,400,000 cash. As of that date Solar had the following account balances: Book Value Fair value Cash $300,000 $300,000 Accounts receivable 325,000 325,000 Inventory 350,000 400,000 Building-net (10 year life) 1,000,000 900,000 Equipment-net (5 year life) 300,000 400,000 Land 600,000 900,000 Accounts Payable 125,000 125,000 Bonds Payable (Face amount $1,000,000, due 12/31/2023) 2,000,000 2,050,000 Common stock 700,000 Additional paid-in capital 250,000 Retained earnings 880,000 In 2019 and 2020, Solar had net income of $250,000 and $240,000, respectively. In addition, Solar paid dividends of $16,000 in both years. Inventory is assumed to be sold in 2019. Assume straight line amortization/ depreciation for assets and bonds payable. What is the amount of goodwill at date of acquisition?

Answer 1

Amount of goodwill $270,000

Explanation:

As per the data given in the question,

Excess of acquisition price $570,000

which is come from

= Total consideration paid - common stock - additional paid in capital - retained earnings

= $2,400,000 - $700,000 - $250,000 - $880,000

= $570,000

Now

Adjustment for difference (fair value minus book value) :

Particulars Book value Fair value Amount

Inventory $350,000 $400,000 $50,000

Building-net $1,000,000 $900,000 ($100,000 )

Equipment-net $300,000 $400,000 $100,000

Land $600,000 $900,000 $300,000

Bonds payable $2,000,000 $2,050,000 ($50,000 )

Total amount $300,000

Now

Amount of goodwill is

= $570,000 - $300,000

= $270,000