Company ABC acquires company XYZ on 12/31/06 in a share-for-share transaction worth $10M. On 12/31/06, XYZ financial statements reported the following:
$$\begin{array} { | l | r | }
\hline \text { Total Assets } & \$ 12 \mathrm { M } \
\hline \text { Liabilities } & \$ 8 \mathrm { M } \
\hline \text { Stockholders' Equity } & \$ 4 \mathrm { M } \
\hline \text { Net income for fiscal 2006 } & \$ 2 \mathrm { M }\
\hline
\end{array}$$ At the time of acquisition, the fair value of XYZ's assets equals its book values, except for plant, property and equipment which has a fair value $2M higher than its book value. Goodwill is expected to be amortized over 10 years, and the average life of depreciable assets is 10 years.
-If ABC uses pooling-of-interests to record the acquisition, the amount of goodwill that will appear on its balance sheet as of 12/31/06 with respect to the acquisition of XYZ will be:

Question

Company ABC acquires company XYZ on 12/31/06 in a share-for-share transaction worth $10M. On 12/31/06, XYZ financial statements reported the following:
 $$\begin{array} { | l | r | } 
\hline \text { Total Assets } & \$ 12 \mathrm { M } \
\hline \text { Liabilities } & \$ 8 \mathrm { M } \
\hline \text { Stockholders' Equity } & \$ 4 \mathrm { M } \
\hline \text { Net income for fiscal 2006 } & \$ 2 \mathrm { M }\
\hline
\end{array}$$ At the time of acquisition, the fair value of XYZ's assets equals its book values, except for plant, property and equipment which has a fair value $2M higher than its book value. Goodwill is expected to be amortized over 10 years, and the average life of depreciable assets is 10 years.
-If ABC uses pooling-of-interests to record the acquisition, the amount of goodwill that will appear on its balance sheet as of 12/31/06 with respect to the acquisition of XYZ will be:

Quizplus · Accepted Answer

Pooling-of-interests method records the acquisition by combining the balance sheets of the two companies, and the goodwill is not recognized as an asset. In this case, the fair value of XYZ's assets equals its book values, except for plant, property, and equipment, which has a fair value $2M higher than its book value. Since the fair value of XYZ's assets equals its book values, there is no extra amount to be added to the balance sheet as goodwill. Therefore, the answer is A) $0.

Company ABC Acquires Company XYZ on 12/31/06 in a Share-For-Share