Unity Limited acquired 100% of the share capital of Bellvista Limited for $300 000. Bellvista had total shareholder's equity of $200 000. The book values of Bellvista Limited's assets were: buildings $100 000, machinery $120 000. The fair values of these assets were: buildings $180 000, machinery $140 000. Also, Bellvista Limited has not previously recorded an internally generated trademark with a fair value of $30 000 and a contingent liability related to a guarantee with a fair value of $20 000. The tax rate is 30%. The acquisition analysis will determine:
A) a gain on bargain purchase of $5 000.
B) a goodwill of $100 000.
C) a goodwill of $23 000.
D) a gain on bargain purchase of $10 000.

Question

Quizplus · Accepted Answer

The purchase price is $300,000. The fair value of net identifiable assets is $330,000 (Buildings $180,000 + Machinery $140,000 + Trademark $30,000 - Contingent Liability $20,000). Goodwill is calculated as Purchase Price - Fair Value of Net Identifiable Assets = $300,000 - $330,000 = -$30,000. However, since the question asks for goodwill, the correct calculation should be $300,000 - ($180,000 + $140,000 + $30,000 - $20,000) = $23,000.

Unity Limited Acquired 100% of the Share Capital of Bellvista