Question

Huey Company acquires 100% of the stock of Solar Corporation on January 1, 2019, for $2,400,000 cash. As of that date Solar had the following account balances:

	Book Value	Fair value
Cash	$300,000	$300,000
Accounts receivable	325,000	325,000
Inventory	350,000	$400,000
Building-net (10 year life)	1,000,000	900,000
Equipment-net (5 year life)	300,000	400,000
Land	600,000	900,000
Accounts Payable	125,000	125,000
Bonds Payable (Face amount $1,000,000; due 12/31/2023)	2,000,000	2,050,000
Common stock	700,000
Additional paid-in capital	250,000
Retained earnings	880,000

In 2019 and 2020, Solar had net income of $250,000 and $240,000, respectively. In addition, Solar paid dividends of $16,000 in both years. Inventory is assumed to be sold in 2019. Assume straight line amortization/ depreciation for assets and bonds payable.

23.      What is the amount of goodwill at date of acquisition?

1. $320,000
2. $270,000
3. $220,000
4. $ 30,000

24.      What amount of inventory would be added to the parent's inventory balance to get consolidated inventory at date of acquisition?

1. $-0-
2. $350,000
3. $400,000

Answer 1

Answer :

Total net assets is sum total of common stock, Additional paid in capital, Retained earnings.

Particulars	Book value
Total consideration paid - A	2,400,000
Common stock	700,000
Additional paid in capital	250,000
Retained earnings	880,000
Total net asset - B	1,830,000
Excess of acquisition price over book value of solar's net assets (A-B)	570,000

The below table explains the Goodwill computation

Particulars	Book value	Fair value	Amount
Excess of acquisition price over book value of Solar's net assets as per above table			570,000	A
Adjustment for difference in fair value minus book value
Inventory	350,000	$400,000	$50,000
Building net (10 year life)	1,000,000	900,000	($100,000)
Equipment net (5 years life)	300,000	400,000	$100,000
Land	600,000	900,000	$300,000
Bonds payable (Face amount $1,000,000 due 12/31/2023) (as this is a liability we take book value - fair value for goodwill comp)	2,000,000	2,050,000	-50,000
			$300,000	B
Goodwill (A - B)			270,000

• 400,000 will be the value of inventory as the company will consolidate all the balances pertaining to solar corporation at fair values.

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