Horse Corporation acquires all of Pony, Inc. for $300,000 cash. On that date, Pony has net assets with fair value of $250,000 but a book value and tax basis of $200,000. The tax rate is 40%. Prior to this date, neither Horse nor Pony has reported any deferred income tax assets or liabilities. What amount of goodwill should be recognized on the date of the acquisition?

Question

Quizplus · Accepted Answer

Goodwill is calculated as the purchase price minus the fair value of net assets acquired. Here, the purchase price is $300,000 and the fair value of net assets is $250,000, resulting in $50,000 goodwill. Additionally, a deferred tax liability of $20,000 (40% of the $50,000 difference between fair value and book value) is recognized, increasing the goodwill to $70,000.

Horse Corporation Acquires All of Pony, Inc