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On March 31, 2016, Wolfson Corporation acquired all of the outstanding common stock of Barney Corporation...

On March 31, 2016, Wolfson Corporation acquired all of the outstanding common stock of Barney Corporation for $17,000,000 in cash. The book values and fair values of Barney’s assets and liabilities were as follows:
Book Value Fair Value
  Current assets $ 6,000,000 $ 7,500,000
  Property, plant, and equipment 11,000,000 14,000,000
  Other assets 1,000,000 1,500,000
  Current liabilities 4,000,000 4,000,000
  Long-term liabilities 6,000,000 5,500,000
Required:
Calculate the amount paid for goodwill.
business   accounting   
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Answer #1
Concepts and reason

Goodwill:

When the cost of purchasing the company is more than the value of the net assets of the company then the excess amount is the amount of goodwill. It is an intangible asset. It has no physical substance. Goodwill is calculated by reducing the value of net assets of a company from the cost of purchasing the company.

The company records the goodwill which represents the excess amount paid for purchasing the company. The goodwill created by the company is not recorded by the company.

Fundamentals

The amount of goodwill is the amount paid in excess over the value of net assets of the company. Goodwill is recorded when it represents purchased goodwill that is the amount paid in excess in the acquisition of another company.

The purchase of goodwill is recorded by debiting the assets at fair value, goodwill is debited. The total liabilities are credited at the fair value and cash paid to purchase the company is credited with the amount of purchase.

The amount of goodwill is written down and not amortized as goodwill has indefinite life. The impairment loss is recorded by debiting the goodwill impairment account and crediting the goodwill by the amount of impairment loss.

Calculate the fair value of the net assets:

Calculation of fair value of net assets (S) 3 4 Assets: 5 Current assets 7,500,000 6 Property, plant, and equipment 14,000,00

The fair value of the net assets is $13,500,000.

Following shows the calculation:

Тв Calculation of fair value of net assets 1 2 3 7500000 14000000 1500000 =SUM(B5:B7) 4 Assets: 5 Current assets 6 Property,

Calculate the amount paid for goodwill:

Calculation of amount of goodwill:

Fair value of net assets Amount paid to acquire Goodwill = the common stock = $17,000,000 - $13,500,000 = $3,500,000

The amount paid for goodwill is $3,500,000.

Ans:

The amount paid for the goodwill is $3,500,000.

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