Chapman Co. acquired all of Klein Co. for $613,000 cash in a tax-free transaction. On that date, the subsidiary had net assets with a $590,000 fair value but a $460,000 book value and income tax basis. The income tax rate was 35%. What amount of goodwill should have been recognized on the date of the acquisition?

Question

Quizplus · Accepted Answer

The goodwill is the excess of the purchase price over the fair value of the net assets acquired. In this case, the purchase price is $613,000, the fair value of the net assets is $590,000, and the book value of the net assets is $460,000. Therefore, the goodwill is $613,000 - $590,000 = $23,000.