In 2012, First Company purchased Second Company for $16,000,000 cash. At the time of purchase Second Company had $18,500,000 in assets and liabilities of $11,000,000. The 2012 balance sheet for First Company should show goodwill of:
A) $0.
B) $3,500,000.
C) $8,500,000.
D) $10,000,000.

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 $16,000,000, and the fair value of net assets acquired is:
$18,500,000 (assets) - $11,000,000 (liabilities) = $7,500,000
Therefore, the goodwill is:
$16,000,000 - $7,500,000 = $8,500,000.

The 2012 balance sheet for First Company should show goodwill of $8,500,000.

In 2012, First Company Purchased Second Company for $16,000,000 Cash