Suppose an acquiring firm pays $100 million for a target firm and the target's assets have a book value of $70 million and an estimated replacement value of $80 million.What amount would be allocated to the acquiring firm's goodwill account?
A) $0 million
B) $20 million
C) $30 million
D) $70 million
E) $80 million

Question

Quizplus · Accepted Answer

Goodwill is calculated as the difference between the acquisition price and the fair market value of the net assets acquired. In this case, the fair market value of the net assets is ($70 million + $80 million) / 2 = $75 million. Therefore, the goodwill will be $100 million - $75 million = $25 million. However, $5 million of that would be attributed to non-controlling interests (if applicable), leaving $20 million to be allocated to the acquiring firm's goodwill account. Therefore, the answer is B.

Suppose an Acquiring Firm Pays $100 Million for a Target