Record Corporation CD Inc.acquires 100% of the outstanding shares of Record Corp.for $1,200,000 and accounts for the transaction using the purchase method.Record Corp's balance sheet at the date of acquisition appears below:
Based on the information concerning Record Corp.what amount of goodwill should CD record at the acquisition date?

Question

Record Corporation CD Inc.acquires 100% of the outstanding shares of Record Corp.for $1,200,000 and accounts for the transaction using the purchase method.Record Corp's balance sheet at the date of acquisition appears below:
 Based on the information concerning Record Corp.what amount of goodwill should CD record at the acquisition date?

Quizplus · Accepted Answer

Goodwill is calculated as the excess of the purchase price over the fair value of the net identifiable assets acquired. 
Purchase price = $1,200,000
Fair value of net identifiable assets acquired = 
Cash = $111,000 
Receivables = $350,000 
Inventory = $525,000
Property, plant, and equipment = $620,000
Liabilities = ($195,000)
Total fair value of net identifiable assets = $1,411,000
Goodwill = $1,200,000 - $1,411,000 = $ (211,000), which is negative.
However, according to ASC 805-10-65-1, goodwill should be measured as the excess of the acquisition-date fair value of the reporting entity over the amounts assigned to the identifiable assets acquired and liabilities assumed. 
Therefore, Goodwill = $1,200,000 - $614,000 = $586,000
The correct answer is B ($614,000).