On January 1, 2021, Harrison Corporation spent $2,600,000 to acquire control over Involved, Inc. This price was based on paying $750,000 for 30% of Involved's preferred stock, and $1,850,000 for 80% of its outstanding common stock. As of the date of the acquisition, Involved's stockholders' equity accounts were as follows: Assuming Involved's accounts are correctly valued within the company's financial statements, what amount of goodwill should be recognized for the Investment in Involved?
A)$(100,000.)
B)$0.
C)$200,000.
D)$812,500.
E)$2,112,500.

Question

On January 1, 2021, Harrison Corporation spent $2,600,000 to acquire control over Involved, Inc. This price was based on paying $750,000 for 30% of Involved's preferred stock, and $1,850,000 for 80% of its outstanding common stock. As of the date of the acquisition, Involved's stockholders' equity accounts were as follows:  Assuming Involved's accounts are correctly valued within the company's financial statements, what amount of goodwill should be recognized for the Investment in Involved?
A)$(100,000.) 
B)$0. 
C)$200,000. 
D)$812,500. 
E)$2,112,500.

Quizplus · Accepted Answer

The calculation of goodwill recognized in this investment is as follows:

Consideration transferred = $2,600,000
Fair value of net assets acquired:
- Preferred stock = $750,000
- Common stock (80% of $2,312,500) = $1,850,000
- Retained earnings = $1,000,000
Total fair value of net assets acquired = $3,600,000

Goodwill = Consideration transferred - Fair value of net assets acquired
Goodwill = $2,600,000 - $3,600,000
Goodwill = $(-1,000,000)

Since the fair value of the net assets acquired exceeds the consideration transferred, we have negative goodwill. However, negative goodwill cannot be recognized as an asset. Instead, it should be recognized as a gain in the income statement in the period of acquisition.

Therefore, the answer is D) $812,500, which is not one of the choices.

On January 1, 2021, Harrison Corporation Spent $2,600,000 to Acquire