On January 1, 2016, 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, 2016, consolidated balance sheet, goodwill would be reported at:
A) $152,000.
B) $177,143.
C) $80,000.
D) $0.

Question

Quizplus · Accepted Answer

The goodwill is calculated as the excess of the purchase price over the fair value of the net identifiable assets acquired. The purchase price is $600,000. The book value of Stork's net assets is $640,000, but the equipment is undervalued by $40,000, making the fair value of the net assets $680,000 ($640,000 + $40,000). However, Lester Company only purchased 70% of Stork, so the fair value of the acquired portion is 70% of $680,000, which is $476,000. The goodwill is then $600,000 (purchase price) - $476,000 (70% of fair value of net assets) = $124,000. However, this calculation does not directly lead to any of the provided choices, suggesting a need for reevaluation of the calculation process based on the provided options.Reevaluating, the correct calculation for goodwill involves considering the excess purchase consideration over the book value of the net assets acquired plus any fair value adjustments. Given the purchase consideration of $600,000 and the fair value adjustment for equipment of $40,000, the calculation should properly account for these factors in determining the goodwill amount that aligns with the provided options.The correct approach involves adjusting the book value of Stork's net assets to reflect the fair value of the equipment, making the adjusted net assets $680,000. The value of the interest acquired (70%) in these adjusted net assets is $476,000 (70% of $680,000). The purchase price for this interest is $600,000, leading to an excess of $124,000. This discrepancy indicates a misunderstanding in the initial explanation provided.Upon further review, the correct calculation for goodwill should directly consider the difference between the purchase price and the proportionate share of Stork's fair value of net assets, including any fair value adjustments, to accurately reflect the goodwill amount in accordance with the principles of accounting for business combinations. The initial explanation failed to accurately calculate the goodwill based on the information provided and the standard accounting practices for such transactions.

On January 1, 2016, Lester Company Purchased 70% of Stork