On January 1, 2013, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is: $\begin{array}{l}\text { Common stock, } \$ 10 \text { par value }(50,000 \text { shares outstanding })&\$500,000\
\text { Preferred stock, } 6 \% \text { cumulative, } \$ 100 \text { par value, }\
3,000 \text { shares outstanding } & 300,000 \
\text { Additional paid in capital } & 200,000 \
\text { Retained earnings } & 500,000\\text { Total stockholders' equity }&\$1,500,000
\end{array}$ Compute the goodwill recognized in consolidation.
A)$800,000.
B)$310,000.
C)$124,000.
D)$0.
E)$(196,000.)

Question

Quizplus · Accepted Answer

The goodwill is calculated as the excess of the consideration transferred over the fair value of the net identifiable assets acquired. The fair value of the net identifiable assets is the total stockholders' equity of $1,500,000. Nichols acquired 80% of the common stock, which is $1,200,000, and 40% of the preferred stock, which is $124,000. The total consideration is $1,324,000. The fair value of the net identifiable assets attributable to Nichols is 80% of $1,500,000, which is $1,200,000. Therefore, the goodwill is $1,324,000 - $1,200,000 = $124,000.

On January 1, 2013, Nichols Company Acquired 80% of Smith