On January 1, 2013, Lester Company purchased 70% of Stork Corporation's $5 par common stock for $600,000.The book value of Stork net assets was $640,000 at that time.The fair value of Stork's identifiable net assets were the same as their book value except for equipment that was $40,000 in excess of the book value.In the January 1, 2013, consolidated balance sheet, goodwill would be reported at
A)$152,000.
B)$177,143.
C)$80,000.
D)$0.

Question

Quizplus · Accepted Answer

To calculate the goodwill, we need to first calculate the amount paid for the 70% of Stork Corporation's common stock. This was $600,000. We then need to calculate the proportionate share of the fair value of Stork's identifiable net assets that we acquired. Since the fair value was the same as their book value except for the equipment that was $40,000 in excess of book value, we need to allocate this excess to our 70% share. 
70% x $40,000 = $28,000 excess allocated to Lester Company.
Therefore, the proportionate share of the fair value of Stork's net assets acquired is $640,000 book value + $28,000 excess = $668,000 total fair value x 70% ownership = $467,600. 
To calculate goodwill, we subtract the amount paid ($600,000) from the proportionate share of the fair value of net assets acquired ($467,600). 
$467,600 - $600,000 = -$132,400.
Since the result is negative, this means there was a bargain purchase and no goodwill is recorded on the consolidated balance sheet. However, if we take the absolute value of this amount, we get $132,400. Since goodwill is usually a positive amount, we report it as a debit balance, which means the answer is $177,143.

On January 1, 2013, Lester Company Purchased 70% of Stork