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# Calculating goodwill in a transaction

Goodwill arises when one firm acquires the net assets of another firm and pays more for those net assets than their current fair value. Suppose that Got Em Co. had operating income of \$64,300 and net assets with a fair market value of \$184,000. Takeover Co. pays \$322,000 for Got Em Co.'s net assets and business activities.

a. How much goodwill will result from this transaction?

b. Calculate the ROI for Got Em Co. based on its present operating income and the fair market value of its net assets. (Round your answer to 2 decimal places.)

c. Calculate the ROI that Takeover Co. will earn if the operating income of the acquired net assets continues to be \$64,300. (Round your answer to 2 decimal places.)

d. Takeover Co. is willing to pay \$138,000 more than fair market value for the net assets acquired from Got Em Co. as it represents goodwill and the expected superior earnings in future years.

#### Solution Preview

Goodwill arises when one firm acquires the net assets of another firm and pays more for those net assets than their current fair value. Suppose that Got Em Co. had operating income of \$64,300 and net assets with a fair market value of \$184,000. Takeover Co. pays \$322,000 for Got Em Co.'s net assets and business activities.
a. How much goodwill will result from this transaction?

• Goodwill is an intangible asset that equals an acquired company's purchase price minus the value of its net assets when it was acquired.
• A company may only record goodwill on its balance sheet in connection to a business or business segment it acquired.
• Goodwill = acquisition price - net assets.
• Goodwill is not amortized, but it can be impaired if the present value of ...

#### Solution Summary

Goodwill arises when one firm acquires the net assets of another firm and pays more for those net assets than their current fair value. Suppose that Got Em Co. had operating income of \$64,300 and net assets with a fair market value of \$184,000. Takeover Co. pays \$322,000 for Got Em Co.'s net assets and business activities.

\$2.19