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.
December 31, 2005
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
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 ...
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.