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    RA Corporation's purchase of AEV with resulting goodwill

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    The balance sheet of RA Corporation at December 31, 2005 is presented below. On December 31, 2005, AEV Corporation purchased RA Corporation for $850,000 in cash. How much goodwill would AEV Corporation record with respect to the purchase of RA Corporation? Assume the fair market value of all assets and liabilities at 12/31/2005 is equal to the book value of the assets and liabilities as reported in the balance sheet.

    RA Corporation
    Balance Sheet
    December 31, 2005

    Cash 150,000
    Accounts Receivable 350,000
    Property, Plant, and Equipment 200,000
    Accumulated Depreciation (135,000)
    Other Assets 250,000
    Total Assets 815,000

    Accounts Payable 175,000
    Accrued Compensation 55,000
    Total Liabilities 230,000

    Common Stock 50,000
    Additional Paid in Capital 350,000
    Retained Earnings 185,000
    Total Shareholder's Equity 585,000

    Total Liabilities and Equity 815,000

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    Solution Preview

    Goodwill is the residual amount that cannot be assigned to specific assets in a business purchase situation. In this case, goodwill is total assets - total liabilities = net assets purchased, or $815,000 - 230,000 = 585,000. The purchase price of $850,000 - 585,000 = 265,000 of goodwill.

    With this corporation, it may odd to you that AEV would have purchased RA for a fairly ...

    Solution Summary

    The solution includes a detailed explanation of the calculation of the amount of goodwill generated in the purchase, but also goes on to list some reasons why RA might have purchased AEV at what appears to be an inflated price. For clarity, the entry to record the purchase is also shown.