Explore BrainMass

Computing Investment and Goodwill

The problem is circled in green in the attachment. My problems are with the first journal entry and with calculating the Goodwill.

I know the first entry to record aquisition is a debit to Investment in Net Assets of Cooper Co. account. I know that it is calculated like this (($1,000,000 * 0.258419) + ($50,000 * 10.594014)) = $788,120. I am not sure how to ge the 0.258419 or the 10.594014. I think it may have something to do with the time value of money, but I am not sure which one. I am asking someone to clarify this so that I understand this problem better.

My second question is on Goodwill. I know this is what the calculation looks like, but I don't know where these numbers came from.

Total Cost of Investment $828,120 (How was this number calculated)

I understand the rest, but would greatly appreciate some guidance on these three numbers.


Solution Preview

First off, they are selling $1,000,000 in bonds. However, they are paying 10 percent per year interest when the market bears 14 percent interest. Therefore, the bonds must sell at a discount. The bond is really the present value of two amount: an regular interest stream of $25,000 every six months for the next 10 years and a lump-sum of $1,000,000 at the end of the 10 years. To compute the proceeds of the sale, we ...

Solution Summary

Using an Excel 97-2003 spreadsheet, this solution illustrates how to compute the value of bonds selling at a discount, how to determine the value of the Investment in Subsidiary using those bonds and related costs, and how to compute the balance of Goodwill.