Kelly Corporation acquires the assets and liabilities of Lawson Company. Below is the balance sheet of Lawson, along with fair values of its assets and liabilities, at the date of acquisition.
$$\begin{array} { | l | r | r | }
\hline & { \begin{array} { c }
\text { Book value } \
\text { Dr (Cr) }
\end{array} } & { \begin{array} { c }
\text { Fair value } \
\text { Dr (Cr) }
\end{array} } \
\hline \text { Current assets } & \$ 1,000,000 & \$ 500,000 \
\hline \text { Plant \& equipment } & 60,000,000 & 30,000,000 \
\hline \text { Identifiable intangibles } & 10,000,000 & 35,000,000 \
\hline \text { Goodwill } & 4,000,000 & 10,000,000 \
\hline \text { Current liabilities } & \{ 2,000,000 \} & \{ 2,000,000 \} \
\hline \text { Long-term liabilities } & \{ 52,000,000 \} & \{ 52,000,000 \} \
\hline \text { Capital stock } & \{ 3,000,000 \} & \
\hline \text { Retained earnings } & \{ 18,000,000 \} & \
\hline
\end{array}$$ Kelly pays $50,000,000 in cash for the assets and liabilities of Lawson. How much goodwill does Kelly record for this acquisition?

Question

Kelly Corporation acquires the assets and liabilities of Lawson Company. Below is the balance sheet of Lawson, along with fair values of its assets and liabilities, at the date of acquisition.
$$\begin{array} { | l | r | r | } 
\hline &  { \begin{array} { c } 
\text { Book value } \
\text { Dr (Cr) }
\end{array} } &  { \begin{array} { c } 
\text { Fair value } \
\text { Dr (Cr) }
\end{array} } \
\hline \text { Current assets } & \$ 1,000,000 & \$ 500,000 \
\hline \text { Plant \& equipment } & 60,000,000 & 30,000,000 \
\hline \text { Identifiable intangibles } & 10,000,000 & 35,000,000 \
\hline \text { Goodwill } & 4,000,000 & 10,000,000 \
\hline \text { Current liabilities } & \{ 2,000,000 \} & \{ 2,000,000 \} \
\hline \text { Long-term liabilities } & \{ 52,000,000 \} & \{ 52,000,000 \} \
\hline \text { Capital stock } & \{ 3,000,000 \} & \
\hline \text { Retained earnings } & \{ 18,000,000 \} & \
\hline
\end{array}$$ Kelly pays $50,000,000 in cash for the assets and liabilities of Lawson. How much goodwill does Kelly record for this acquisition?

Quizplus · Accepted Answer

The goodwill recorded by Kelly for this acquisition is calculated by subtracting the fair value of net assets acquired from the purchase price. The fair value of net assets is calculated as the sum of the fair values of assets minus the fair values of liabilities. Here, the fair values are: Current assets ($500,000) + Plant & equipment ($30,000,000) + Identifiable intangibles ($35,000,000) - Current liabilities ($2,000,000) - Long-term liabilities ($52,000,000) = $11,500,000. The purchase price is $50,000,000. Therefore, the goodwill is $50,000,000 - $11,500,000 = $38,500,000.

Kelly Corporation Acquires the Assets and Liabilities of Lawson Company