Pine & Scent scenario:
Pine Company purchased a 60% interest in the Scent Company on January 1, 20X1 for $360,000. On that date, the stockholders' equity of Scent Company was $450,000. Any excess cost on 1/1/X1 was attributable to goodwill. Pine purchased another 20% interest on January 1, 20X4 for $200,000. On January 1, 20X4, Scent Company's stockholders' equity was $700,000, the entire increase due to retained earnings.
-Refer to the Pine and Scent scenario. The goodwill balance on the December 31, 20X4, balance sheet is ____.

Question

Quizplus · Accepted Answer

First, we need to calculate the total goodwill on the date of acquisition in 20X1.

60% interest acquired for $360,000 implies a total value of $600,000 (360,000/0.6). 
On that date, Scent Company's equity was $450,000, so the implied goodwill is $150,000 (600,000 - 450,000).

When Pine purchased another 20% interest in 20X4 for $200,000, the implied value of Scent Company is $1,000,000 (200,000/0.2).

We know that Scent Company's stockholders' equity was $700,000 on January 1, 20X4, and the entire increase was due to retained earnings. Therefore, the equity attributable to Pine is:

- 60% interest in 20X4: $420,000 (60% x 700,000)
- 20% interest in 20X4: $140,000 (20% x 700,000)

Total equity attributable to Pine is $560,000 ($420,000 + $140,000).

To calculate the goodwill balance on December 31, 20X4, we need to compare the implied value of Scent Company to the equity attributable to Pine.

Implied value of Scent Company: $1,000,000 
Equity attributable to Pine: $560,000

Therefore, the goodwill balance on December 31, 20X4, is $440,000 ($1,000,000 - $560,000).

Pine & Scent Scenario