Purchase Solution

# Calculate goodwill in acquisition

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On July 1 of the current year, Melissa Co. acquired 25% of the outstanding shares of common stock of International Co. at a total cost of \$700,000. At the time, the equity (net assets) of International Co. totaled \$2,400,000, meaning that the \$700,000 purchase price was greater than 25% of net assets. Melissa was willing to pay more than book value for the Internation Co. stock for the following reasons:

a) International owned depreciable plant assets (10-year remaining economic life) with a current fair value of \$60,000 more than their carrying amount.
b) International owned land with a current fair value of \$300,000 more than its carrying amount.
c) There are no other identifiable tangible or intangible assets with fair value in excess of book value. Accordingly, the remaining excess, if any, is to be allocated to goodwill.

International Co. earned net income of \$540,000 evenly over the current year ended December 31. On December 31, International declared and paid a cash dividend of \$105,000 to common stockholders. Fair value of Melissa's share of the stock at December 31 is \$750,000. Both companies close their accounting records on December 31.

Instructions:

1. Compute the total amount of goodwill of International Co. based on the price paid by Melissa Co.

2. Prepare all journal entries in Melissa's accounting records relating to the investment for year ended December 31 under the cost method of accounting, classifying the securities as available for sale.

3. Prepare all journal entries in Melissa's accounting records relating to the investment for year ended December 31 under the equity method of accounting.

##### Solution Summary

The solution explains how to calculate goodwill in acquisition and journal entries under the cost method and equity method

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