Question

Goodwill Elm Company is considering purchasing EKC Company. EKC's balance sheet at December 31, 2019, is...

Goodwill

Elm Company is considering purchasing EKC Company. EKC's balance sheet at December 31, 2019, is as follows:

Cash $ 50,000 Current liabilities $ 60,000
Accounts receivable 70,000 Bonds payable 200,000
Inventory 120,000 Common stock 300,000
Property, plant, and equipment (net) 600,000 Retained earnings 280,000
$840,000 $840,000

At December 31, 2019, Elm discovered the following about EKC:

  1. No allowance for uncollectible accounts has been established. An allowance of $5,000 is considered appropriate.
  2. The LIFO inventory method has been used. The FIFO inventory method would be used if EKC were purchased by Elm. The FIFO inventory valuation of the December 31, 2019, ending inventory would be $180,000.
  3. The fair value of the property, plant, and equipment (net) is $730,000.
  4. The company has an unrecorded patent that is worth $120,000.
  5. The book values of the current liabilities and bonds payable are the same as their market values.

Required:

1. Compute the value of the goodwill if Elm pays $1,350,000 for EKC.

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Answer #1
Cash      50,000.00
Accounts Receivable      65,000.00
Inventory    180,000.00
Fair Value of Property    730,000.00
Patent    120,000.00
Current Liabilities -   60,000.00
Bond - 200,000.00
Common Stock - 300,000.00
Retained Earnings - 280,000.00
Net identifiable assets    305,000.00

Goodwilll = 1,350,000 - 305,000 = 1,045,000

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