Britain Corporation acquires all of English, Inc.for $800,000 cash.On that date, English has net assets with fair value of $750,000 but a book value and tax basis of $500,000.The tax rate is 35 percent.Prior to this date, neither Britain nor English has reported any deferred income tax assets or liabilities.What amount of goodwill should be recognized on the date of the acquisition?

Question

Quizplus · Accepted Answer

The goodwill is calculated as the difference between the consideration transferred ($800,000) and the net assets acquired at fair value ($750,000), adjusted for the tax effect. The tax effect is calculated as the difference between the tax basis of the net assets acquired ($500,000) and their fair value ($750,000), multiplied by the tax rate (35%).

Goodwill = Consideration - Net assets acquired at fair value + Tax effect 
Goodwill = $800,000 - $750,000 + ($750,000 - $500,000) x 35% 
Goodwill = $137,500

Britain Corporation Acquires All of English, Inc