Suppose Parrot Mfg. purchases Clint Enterprises for $120 million in cash. For purposes of the acquisition, Clint's fixed assets were appraised at $95 million. Further, assume Clint Enterprises has working capital of $15 million and no long-term debt. If Parrot Mfg. uses the purchase accounting method to account for the acquisition, goodwill of ______________ is created.
A) $10 million
B) $15 million
C) $25 million
D) $35 million
E) $80 million

Question

Quizplus · Accepted Answer

Goodwill is calculated as the purchase price minus the fair value of net assets acquired. In this case, the purchase price is $120 million, and the fair value of net assets (fixed assets of $95 million + working capital of $15 million = $110 million) is $110 million. Therefore, goodwill created is $120 million - $110 million = $10 million.