On January 4, 2013, Bailey Corp. purchased 40% of the voting common stock of Emery Co., paying $3,000,000. Bailey properly accounts for this investment using the equity method. At the time of the investment, Emery's total stockholders' equity was $5,000,000. Bailey gathered the following information about Emery's assets and liabilities whose book values and fair values differed: Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Emery Co. reported net income of $400,000 for 2013, and paid dividends of $200,000 during that year.
How much goodwill is associated with this investment?

Question

On January 4, 2013, Bailey Corp. purchased 40% of the voting common stock of Emery Co., paying $3,000,000. Bailey properly accounts for this investment using the equity method. At the time of the investment, Emery's total stockholders' equity was $5,000,000. Bailey gathered the following information about Emery's assets and liabilities whose book values and fair values differed:  Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Emery Co. reported net income of $400,000 for 2013, and paid dividends of $200,000 during that year.
How much goodwill is associated with this investment?

Quizplus · Accepted Answer

$800,000 Blgs + $500,000 Equipt + $700,000 Franchises = $2,000,000 FV > BV of Assets$2,000,000 × 40% = $800,000 FV Identified to Purchaser$1,000,000 Price Paid - $800,000 FV > BV = $200,000 Excess Unidentified (Goodwill)