Jones Company acquired Jackson Company for $2,000,000 cash.At that time, the fair value of recorded assets and liabilities was $1,500,000 and $250,000, respectively.If Jackson meets specified sales targets, Jones is required to pay an additional $200,000 in cash per the acquisition agreement.Jones estimates the probability of this to be 50%.The direct costs related to the acquisition were $50,000.What was the amount of the goodwill related to the acquisition?

Question

Jones Company acquired Jackson Company for $2,000,000 cash.At that time, the fair value of recorded assets and liabilities was $1,500,000 and $250,000, respectively.If Jackson meets specified sales targets, Jones is required to pay an additional $200,000 in cash per the acquisition agreement.Jones estimates the probability of this to be 50%.The direct costs related to the acquisition were $50,000.What was the amount of the goodwill related to the acquisition?​

Quizplus · Accepted Answer

Goodwill is calculated as the purchase price minus the fair value of net assets acquired. The initial purchase price is $2,000,000. The fair value of net assets is the fair value of assets ($1,500,000) minus the fair value of liabilities ($250,000), which equals $1,250,000. The contingent consideration (additional payment) is estimated at 50% of $200,000, which is $100,000. The direct costs related to the acquisition ($50,000) do not affect the calculation of goodwill. Therefore, the total purchase price considered for goodwill calculation is $2,000,000 + $100,000 = $2,100,000. Subtracting the fair value of net assets ($1,250,000) from this gives a goodwill amount of $850,000.

Jones Company Acquired Jackson Company for $2,000,000 Cash