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 purchase accounting 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 purchase accounting 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

Under purchase accounting, the fair value of the consideration transferred (which is the fair value of ABC's shares given to XYZ's shareholders) is compared to the fair value of the identifiable assets and liabilities acquired. In this case, the fair value of the consideration transferred is not given but assuming it to be $10M (as mentioned in the question), the fair value of identifiable net assets acquired would be $12M (total assets) - $8M (liabilities) = $4M. Since there is no consideration paid in excess of the fair value of the identifiable net assets acquired, there is no need to recognize any goodwill in this transaction.

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