Octane Company and Bio Company have announced terms of an exchange agreement under which Octane will issue 10,000 shares of its $5 par value common stock to acquire all of Bio's assets.Octane shares are trading at $28,and Bio's $10 par value shares are trading at $15.Historical cost and fair value balance sheet data on January 1,2008,are as follows:

-Based on the information provided,what amount of goodwill will be reported immediately following the business combination in the combined company's balance sheet?

Question

Octane Company and Bio Company have announced terms of an exchange agreement under which Octane will issue 10,000 shares of its $5 par value common stock to acquire all of Bio's assets.Octane shares are trading at $28,and Bio's $10 par value shares are trading at $15.Historical cost and fair value balance sheet data on January 1,2008,are as follows:
 
-Based on the information provided,what amount of goodwill will be reported immediately following the business combination in the combined company's balance sheet?

Quizplus · Accepted Answer

First, we need to calculate the fair value of Bio's assets:
Cash: $15,000
Inventory: $60,000
Plant and Equipment: $300,000
Total Fair Value: $375,000

Next, we need to calculate the amount of consideration transferred by Octane:
10,000 shares x $28 per share = $280,000

Since the fair value of Bio's assets ($375,000) is greater than the consideration transferred by Octane ($280,000), there is no goodwill recorded in the transaction.

Therefore, the answer is C) $0.

Octane Company and Bio Company Have Announced Terms of an Exchange