CD Inc. acquires 100% of the outstanding shares of Record Corp. for $1,200,000 and accounts for the transaction using the purchase method. Record Corp's balance sheet at the date of acquisition appears below: Based on the information concerning Record Corp. what amount of goodwill should CD record at the acquisition date?

Question

CD Inc. acquires 100% of the outstanding shares of Record Corp. for $1,200,000 and accounts for the transaction using the purchase method. Record Corp's balance sheet at the date of acquisition appears below:  Based on the information concerning Record Corp. what amount of goodwill should CD record at the acquisition date?

Quizplus · Accepted Answer

Goodwill = Purchase price - fair value of identifiable net assets
Purchase price = $1,200,000
Fair value of identifiable net assets = 
- Cash and marketable securities = $350,000
- Accounts receivable = $370,000
- Inventory = $450,000
- Property, plant, and equipment = $900,000
- Patents = $126,000
Total fair value of identifiable net assets = $2,196,000

Goodwill = $1,200,000 - $2,196,000 = ($996,000)
However, since the acquired company has a negative net asset value, we must recognize a gain instead of goodwill. Therefore, the amount that CD should record at the acquisition date is $1,200,000 - ($2,196,000) = $614,000.

CD Inc Acquires 100% of the Outstanding Shares of Record Corp