Snowflake, Corp. Penguin, Inc. acquires 100% of the outstanding shares of Snowflake Corp. for $2,250,000 and accounts for the transaction using the purchase method. Snowflake's balance sheet at the acquisition date is as follows:
Based on the information concerning Snowflake Corp. what is the value of the goodwill related to the acquisition?

Question

Snowflake, Corp. Penguin, Inc. acquires 100% of the outstanding shares of Snowflake Corp. for $2,250,000 and accounts for the transaction using the purchase method. Snowflake's balance sheet at the acquisition date is as follows:
 Based on the information concerning Snowflake Corp. what is the value of the goodwill related to the acquisition?

Quizplus · Accepted Answer

Goodwill is calculated as the excess of the purchase price over the fair value of identifiable assets acquired minus liabilities assumed. 
In this case, the fair value of identifiable assets acquired and liabilities assumed is: 
Cash and Cash Equivalents = $1,500,000
Inventory = $2,000,000
Property, Plant and Equipment (PPE) = $8,000,000
Liabilities = ($2,000,000)
Net Identifiable Assets = $9,500,000
Purchase Price = $2,250,000
Excess Purchase Price = $2,250,000 – $9,500,000 = -$7,250,000 
Since the excess purchase price is negative, there is no goodwill, and therefore, the correct answer is D.