On January 1, 2011, Harrison Corporation spent $2,600,000 to acquire control over Involved, Inc. This price was based on paying $750,000 for 30 percent of Involved's preferred stock, and $1,850,000 for 80 percent of its outstanding common stock. As of the date of the acquisition, Involved's stockholders' equity accounts were as follows: Assuming Involved's accounts are correctly valued within the company's financial statements, what amount of goodwill should be recognized for the Investment in Involved?

Question

On January 1, 2011, Harrison Corporation spent $2,600,000 to acquire control over Involved, Inc. This price was based on paying $750,000 for 30 percent of Involved's preferred stock, and $1,850,000 for 80 percent of its outstanding common stock. As of the date of the acquisition, Involved's stockholders' equity accounts were as follows:  Assuming Involved's accounts are correctly valued within the company's financial statements, what amount of goodwill should be recognized for the Investment in Involved?

Quizplus · Accepted Answer

The purchase price of $2,600,000 was allocated as follows:
Preferred stock: $750,000 / 30% = $2,500,000 (total value of preferred stock)
Common stock: $1,850,000 / 80% = $2,312,500 (total value of common stock)
Total equity value = $2,500,000 + $2,312,500 = $4,812,500
Purchase price in excess of equity value = $2,600,000 - $4,812,500 = $(2,212,500)
Since the fair value of Involved's identifiable net assets was $1,400,000, the remaining $(2,212,500 - $1,400,000) = $812,500 should be allocated to goodwill. Therefore, the answer is D.

On January 1, 2011, Harrison Corporation Spent $2,600,000 to Acquire