On January 1, 2009, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is: Compute the goodwill recognized in consolidation.

Question

On January 1, 2009, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:  Compute the goodwill recognized in consolidation.

Quizplus · Accepted Answer

To compute the goodwill recognized in consolidation, we need to calculate the fair value of the net assets acquired and compare it to the consideration transferred. The fair value of the net assets acquired is calculated as follows:

Common stock: 
- Book value: $800,000 
- Fair value: $1,000,000 (80% x $1,250,000) 
- Excess fair value: $200,000

Preferred stock: 
- Book value: $310,000 ($775,000 x 40%) 
- Fair value: $310,000 
- Excess fair value: $0

Total excess fair value: $200,000

Since the total consideration transferred by Nichols was $1,324,000 ($1,200,000 for the common and $124,000 for the preferred), the goodwill recognized in consolidation is $200,000 ($1,324,000 - $1,124,000). Therefore, the correct answer is B.

On January 1, 2009, Nichols Company Acquired 80% of Smith