Halcomb Company's balance sheet on December 31, 2020, was as follows: $$\begin{array}{l}
\text { Assets }\
\begin{array} { l r }
\text { Cash } & \$ 80,000 \
\text { Trade accounts receivable (net) } & 160,000 \
\text { Inventories } & 400,000 \
\text { Plant assets (net) } & \underline { 720,000 } \
\text { Total assets } & \$ 1,360,000 \
\text { Liabilities \& Stockholders' Equity } & \
\text { Current liabilities } & 240,000 \
\text { Long-term debt } & 400,000 \
\text { Common stock, \$1 par } & 80,000 \
\text { Additional paid-in capital } & 160,000 \
\text { Retained earnings } & \underline { 480,000 } \
\text { Total liabilities \& stockholders' equity } & \$ 1,360,000 \
\hline
\end{array}
\end{array}$$
On December 31, 2020, Ruth Corporation acquired all the outstanding common stock of Halcomb for $1,200,000. On that date, the current fair value of Halcomb's inventories was $360,000 and the current fair value of Halcomb's plant assets was $800,000. The current fair values of all other identifiable assets and liabilities of Halcomb were equal to their carrying amounts.
As a result of the acquisition of Halcomb by Ruth, the December 31, 2020, consolidated balance sheet of Ruth and subsidiary displays goodwill in the amount of:
A) $400,000
B) $440,000
C) $480,000
D) $520,000

Question

Halcomb Company's balance sheet on December 31, 2020, was as follows: $$\begin{array}{l}
\text { Assets }\
\begin{array} { l r } 
\text { Cash } & \$ 80,000 \
\text { Trade accounts receivable (net) } & 160,000 \
\text { Inventories } & 400,000 \
\text { Plant assets (net) } & \underline { 720,000 } \
\text { Total assets } & \$ 1,360,000 \
\text { Liabilities \& Stockholders' Equity } & \
\text { Current liabilities } & 240,000 \
\text { Long-term debt } & 400,000 \
\text { Common stock, \$1 par } & 80,000 \
\text { Additional paid-in capital } & 160,000 \
\text { Retained earnings } & \underline { 480,000 } \
\text { Total liabilities \& stockholders' equity } & \$ 1,360,000 \
\hline
\end{array}
\end{array}$$
On December 31, 2020, Ruth Corporation acquired all the outstanding common stock of Halcomb for $1,200,000. On that date, the current fair value of Halcomb's inventories was $360,000 and the current fair value of Halcomb's plant assets was $800,000. The current fair values of all other identifiable assets and liabilities of Halcomb were equal to their carrying amounts.
As a result of the acquisition of Halcomb by Ruth, the December 31, 2020, consolidated balance sheet of Ruth and subsidiary displays goodwill in the amount of:
A) $400,000
B) $440,000
C) $480,000
D) $520,000

Quizplus · Accepted Answer

To calculate goodwill, we need to first calculate the total value of the net identifiable assets acquired by Ruth. The fair values of the inventories and plant assets acquired are $360,000 and $800,000, respectively. The net identifiable assets acquired can be calculated as follows:

\begin{align*}
	ext{Net identifiable assets} &= 	ext{Fair value of inventories} + 	ext{Fair value of plant assets} \
&= \$360,000 + \$800,000 \
&= \$1,160,000
\end{align*}

Ruth paid $1,200,000 for the acquisition, which means that $40,000 of the purchase price cannot be allocated to any identifiable assets. This excess amount is recorded as goodwill. Therefore, the goodwill can be calculated as follows:

\begin{align*}
	ext{Goodwill} &= 	ext{Purchase price} - 	ext{Net identifiable assets} \
&= \$1,200,000 - \$1,160,000 \
&= \$40,000
\end{align*}

Therefore, the December 31, 2020, consolidated balance sheet of Ruth and subsidiary displays goodwill in the amount of $40,000, which is Choice B.

Halcomb Company's Balance Sheet on December 31, 2020, Was as Follows