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Goodwill on Company Acquistion

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6. A and B Companies have been operating separately for five years. Each company has a minimal amount of liabilities and a simple capital structure consisting solely of voting common stock. A Company, in exchange for 40 percent of its voting stock, acquires 80 percent of the common stock of B Company. This was a "tax-free" stock-for-stock (type B) exchange for tax purposes. B Company assets have a total net fair market value of $800,000 and a total net book value of $580,000. The fair market value of the A stock used in the exchange was $700,000. The goodwill on this acquisition would be:
a. Zero.
b. $60,000.
c. $120,000.
d. $236,000.

Please provide a break down in each catagory when arriving at the answer
fair market value
book value
Common Stock
Additional Paid-In Capital
Goodwill

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Solution Preview

ANSWER: B

Fair Market Value: 800,000*80%=640,000
Book ...

Solution Summary

This solution identifies the correct answer and shows step-by-step calculations on goodwill acquisition of B Company by A Company.

$2.19
See Also This Related BrainMass Solution

Melissa: Calculate goodwill in acquisition, prepare journal entries under two methods

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.

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