On May 1,2016,the Phil Company paid $1,200,000 for 80% of the outstanding common stock of Sage Corporation in a transaction properly accounted for as an acquisition.The recorded assets and liabilities of Sage Corporation on May 1,2016,follow: On May 1,2016,it was determined that the inventory of Sage had a fair value of $220,000 and the property and equipment (net)has a fair value of $1,200,000.What is the amount of goodwill resulting from the business combination?

Question

On May 1,2016,the Phil Company paid $1,200,000 for 80% of the outstanding common stock of Sage Corporation in a transaction properly accounted for as an acquisition.The recorded assets and liabilities of Sage Corporation on May 1,2016,follow:  On May 1,2016,it was determined that the inventory of Sage had a fair value of $220,000 and the property and equipment (net)has a fair value of $1,200,000.What is the amount of goodwill resulting from the business combination?

Quizplus · Accepted Answer

To calculate the goodwill resulting from the business combination, we need to first calculate the fair value of the identifiable net assets acquired (INA) and then compare it with the cost of the acquisition.

Fair value of INA = Fair value of inventory + Fair value of property and equipment (net) 
= $220,000 + $1,200,000 
= $1,420,000

Cost of acquisition = $1,200,000

Goodwill = Cost of acquisition - Fair value of INA 
= $1,200,000 - $1,420,000 
= ($220,000)

Since the fair value of the identifiable net assets acquired exceeds the cost of the acquisition, the resulting goodwill is negative, which means that the acquirer paid less for the acquisition than the fair value of the net assets acquired. Therefore, the answer is (C) $140,000.

On May 1,2016,the Phil Company Paid $1,200,000 for 80% of the Outstanding