On January 1, 2016, Rabb Corp.purchased 80% of Sunny Corp.'s $10 par common stock for $975,000.On this date, the carrying amount of Sunny's net assets was $1,000,000.The fair values of Sunny's identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $100,000 in excess of the carrying amount.
In the January 1, 2016, consolidated balance sheet, goodwill should be reported at ____.

Question

On January 1, 2016, Rabb Corp.purchased 80% of Sunny Corp.'s $10 par common stock for $975,000.On this date, the carrying amount of Sunny's net assets was $1,000,000.The fair values of Sunny's identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $100,000 in excess of the carrying amount. ​
In the January 1, 2016, consolidated balance sheet, goodwill should be reported at ____.

Quizplus · Accepted Answer

The calculation of goodwill in a business combination involves determining the excess of the purchase price over the fair value of the net assets acquired. Here, Rabb Corp. purchased 80% of Sunny Corp. for $975,000. The carrying amount of Sunny's net assets was $1,000,000, but the fair value of its plant assets was $100,000 more than the carrying amount, making the fair value of Sunny's net assets $1,100,000 ($1,000,000 + $100,000). The purchase price for 80% interest is $975,000, which implies a 100% value of $1,218,750 ($975,000 / 0.8). The goodwill is then calculated as the difference between this implied full value and the fair value of the net assets: $1,218,750 (implied full value) - $1,100,000 (fair value of net assets) = $118,750.