Lake Incorporated purchased all of the outstanding stock of Huron Company paying $850,000 cash.Lake assumed all of the liabilities.Book values and fair values of acquired assets and liabilities were: Lake would record goodwill of:

Question

Quizplus · Accepted Answer

Goodwill is calculated as the excess of the purchase price over the fair value of net assets acquired. The fair value of net assets acquired in this case is:

Fair value of assets acquired: $450,000 + $300,000 + $200,000 + $50,000 = $1,000,000 
Fair value of liabilities assumed: $150,000 
Net assets acquired: $850,000

Therefore, the goodwill is calculated as:

Goodwill = Purchase price – Net assets acquired 
Goodwill = $850,000 – $1,000,000 
Goodwill = ($150,000)

Since the fair value of net assets acquired exceeds the purchase price, there is negative goodwill, which is recorded as an immediate gain in the income statement. However, since the question only asks for the goodwill amount, the answer is B) $150,000.

Lake Incorporated Purchased All of the Outstanding Stock of Huron