Question

Munchies, Inc., dominates the snack-food industry with its Salty Chip brand. Assume that Munchies purchased Sweet Snacks Company for $5.4 million cash. The market value of Sweet Snacks’ assets is $10 million, and Sweet Snacks has liabilities with a market value of $7.1 million.

Required:
a. Compute the cost of the goodwill purchased by Munchies.
b. Explain how Munchies will account for goodwill in future years.

Answer 1

$2500000

Step-by-step explanation:

A

1. Goodwill = purchase consideration - market value of net assets of the company

Market value of net assets of the company =$10000000-$7100000

=$2900000

Therefore goodwill=$5400000-$2900000=

$2500000

2. Under GAAP and IFRS, goodwill is an intangible asset that has an indefinite useful life and not amortized like other depreciable assets