Jastoon Co.acquired all of Wedner Co.for $588,000 in cash in a tax-free transaction.On that date,the subsidiary had net assets with a $560,000 fair value but a $420,000 book value and income tax basis.The income tax rate was 30%.What amount of goodwill should have been recognized on the date of the acquisition?

Question

Quizplus · Accepted Answer

Goodwill is a residual amount and is calculated as the excess of purchase price over the fair value of net assets acquired. In this case, the purchase price is $588,000 and the fair value of net assets acquired is $560,000. Therefore, the goodwill is $588,000 - $560,000 = $28,000. However, since the net assets also have a lower income tax basis than their book value, the goodwill would be adjusted upwards by the tax benefit resulting from the step-up in basis. The tax benefit is calculated as 30% of the difference between the book value and tax basis, which is ($420,000 - $560,000) * 30% = $42,000 * 30% = $12,600. Adding this tax benefit to the initial goodwill of $28,000 gives a final goodwill of $40,600. Therefore, the correct answer is A) $70,000 ($40,600 + $28,000).