Question

Alexander paid $148,000 to acquire 100% of Willis Corporation in a statutory merger. Alexander also agreed to pay the shareholders of Willis $0.80 in cash for every dollar in income from continuing operations of the combined entity over $75,000 in the first year following acquisition. Alexander projects that there is a 10% (45%, 25%, 20%) probability that the income from continuing operations for the year is $65,000 ($75,000, $85,000, $95,000 respectively). Alexander uses a discount rate of 8%.

Information for Willis Corporation immediately before the merger was as follows:

	Book Value	Fair Value
Current Assets	$40,000	$50,000
Plant Assets	$120,000	$70,000
Liabilities	$50,000	$45,000

Previously unreported items identified as belonging to Willis:

	Fair Value
Contracts under negotiation with potential customers	$15,000
Customer contracts for consulting projects	$7,000
In-process research and development	$8,000
Skilled workforce	$23,000
Recent favorable press reports on Willis	$2,000
Proprietary databases	$12,000

Determine the goodwill to be reported in this acquisition.

Answer 1

Solution:
	Calculation of Goodwill:
	Particulars	$
	Consideration Paid	$ 148,000.00
	Add: Present value of the Consideration to be paid after 1 year (Note 1)	$     4,814.81
	Less : Fair Value of the Identifiable Net Assets (Note 2)	$ 142,000.00
	Goodwill	$   10,814.81
Note 1	Present value of the deferred Consideration:
Probability	Income from Continuing operations	Payment to shareholders [(Income-75000)*.8]
0.1	$                                                                                                              65,000.00	-
0.45	$                                                                                                              75,000.00	-
0.25	$                                                                                                              85,000.00	$                                                                   2,000.00
0.2	$                                                                                                              95,000.00	$                                                                   3,200.00
		$                                                                   5,200.00
	Therefore Total Payment expected to be paid after 1 year =	$     5,200.00
	Present value of this $24000 discounted at 8% =	$     4,814.81
Note 2	Fair Value of the Identifiable Net Assets
	Particulars	Fair Value
	Current Assets	$   50,000.00
	Plan Assets	$   70,000.00
	Contracts under negotiation with potential customers	$   15,000.00
	Customer contracts for consu Solution: Calculation of Goodwill: Particulars $ Consideration Paid $ 148,000.00 Add: Present value of the Consideration to be paid after 1 year (Note 1) $     4,814.81 Less : Fair Value of the Identifiable Net Assets (Note 2) $ 142,000.00 Goodwill $   10,814.81 Note 1 Present value of the deferred Consideration: Probability Income from Continuing operations Payment to shareholders [(Income-75000)*.8] 0.1 $                                                                                                              65,000.00 - 0.45 $                                                                                                              75,000.00 - 0.25 $                                                                                                              85,000.00 $                                                                   2,000.00 0.2 $                                                                                                              95,000.00 $                                                                   3,200.00 $                                                                   5,200.00 Therefore Total Payment expected to be paid after 1 year = $     5,200.00 Present value of this $24000 discounted at 8% = $     4,814.81 Note 2 Fair Value of the Identifiable Net Assets Particulars Fair Value Current Assets $   50,000.00 Plan Assets $   70,000.00 Contracts under negotiation with potential customers $   15,000.00 Customer contracts for consulting projects $     7,000.00 In-process research and development $     8,000.00 Skilled workforce $   23,000.00 Recent favorable press reports on Willis $     2,000.00 Proprietary databases $   12,000.00 $ 187,000.00 Less : Liabilities $   45,000.00 Net Assets $ 142,000.00 lting projects	$     7,000.00
	In-process research and development	$     8,000.00
	Skilled workforce	$   23,000.00
	Recent favorable press reports on Willis	$     2,000.00
	Proprietary databases	$   12,000.00
		$ 187,000.00
	Less : Liabilities	$   45,000.00
	Net Assets	$ 142,000.00